Big Kid Paints is a national paint manufacturer and retailer. (Click the icon to view additional information.) Assume that management has specified a 22% target rate of return. X Requirements X Data Table - The company is segmented into five divisions: Paint Stores (branded retail location), Consumer (paint sold through stores such as Sears, Home Depot, and Lowe's), Automotive (sales to auto manufacturers), International, and Administration. The following is selected hypothetical divisional information for the company's two largest divisions: Paint Stores and Consumer (in thousands of dollars). Round all calculations to two decimal places. 1. Calculate each division's ROI. 2. Calculate each division's sales margin. Interpret your results. 3. Calculate each division's capital turnover. Interpret your results. 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results. 5. Calculate each division's RI. Interpret your results and offer recommendations for any division with negative RI. 6. Total asset data were provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices. 7. Describe some of the factors that management considers when setting its minimum target rate of return. 8. Explain why some firms prefer to use Rl rather than ROI for performance measurement. 9. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centers. Sales Operating Income Paint Stores ... $ 3,900,000 $ Total Assets $ 1,500,000 $ 2,000,000 507,000 Consumer ..... $ 1,100,000 $ 176,000 Print Done Requirement 1. Calculate each division's ROI. First enter the formula, then calculate the ROI for each division. (Enter the ROI as a percent rounded to the nearest hundredth of a percentage, XXX%.) = ROI Paint Stores % Consumer % Requirement 2. Calculate each division's sales margin. Interpret your results. Enter the formula, then calculate the sales margin for each division. (Enter the sales margin as a percent rounded to the nearest hundredth of a percentage, XXX%.) Sales margin Paint Stores % Consumer % Interpret your results. The V Division is more profitable on each dollar of sales. Requirement 3. Calculate each division's capital turnover. Interpret your results. First enter the formula, then calculate the capital turnover for each division. (Round to two decimal places.) Capital turnover Paint Stores times Consumer times The Division is more efficient in generating sales with its assets. Requirement 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results. First enter the expanded ROI formula, then calculate the ROI for each division. (Enter the ROI as a percent rounded to the nearest hundredth of a percentage, X.XX%.) ROI Paint Stores % % Consumer % % The Consumer Division's profitability on each dollar of sales is V than the Paint Stores Division's profitability. However, the Paint Store Division's efficiency is significantly than the Consumer Division's efficiency. These results cause the Paint Stores Division's ROI to be the Consumer Division's ROI. Requirement 5. Calculate each division's RI. Interpret your results and offer recommendations for any division with negative RI. First enter the formula, then calculate the RI for each division. (Enter the amount in thousands. Use parentheses or a minus sign for negative residual incomes.) X ) = RI Paint Stores %) = Consumer %) Interpret your results and offer recommendations for any division with negative RI. meeting management's target rate of return. The should work on improving its Improving this may help the division achieve positive residual income. Requirement 6. Total asset data were provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices. Most companies use the Vasset balance since the income used in the ROI calculation is earned over the year. Management must also decide whether they wish to use the gross book value of assets or the net book value of assets. The V book value is often used because it is easily pulled from the balance sheet. However, ROI using that value will artificially rise over time due to
