Example: Jesper, Inc. provided the following data on its East and West Divisions for last year: East Division West Division Sales $340,000 $1,670,000 1,450,000 Expenses 245,000 900,000 2,500,000 Assets, January 1 Assets, December 31 940,000 2,400,000 Calculate the missing values in the following table: East Division West Division Operating income 96,700 $ 220,000 Average operating assets 919,450 244,200 ROI can be calculated in two different ways. One is to divide operating income by average operating assets. The second is to calculate margin and turnover and then multiply margin times turnover. For the East Division: Margin = $95,000/$340,000 = 0.2794 Turnover = $340,000/$920,000 = 0.3696 Margin can be thought of as a percent - that is, margin is the percent return (operating income) on sales. Turnover is just a number, not a percent. It can bethought of as the number of times assets turnover during a year. ROL for the Fast Divisinn = $95 On/4920 on = n 1033 nr 10 3 30% ROI for the East Division $95,000/$920,000 = 0.1033 or 10.33% or, using margin x turnover: ROI for the East Division = 0.2794 x 0.3696 = 0.1033 or 10.33% The East Division is earning just over ten percent on its asset or investment base. Calculate the following amounts for the West Division, rounded to four significant digits: Margin 0.1317 Turnover ROI 0.0898 or 8.98 % Clearly the East Division is earning relatively more on its assets than the West Division. How could the West Division increase its ROI? Select all of the following: Suppose that the East Division increased revenue to $350,000 and nothing else changed. What impact would that have on margin turnover , and ROI ? Suppose that the East Division increased ending assets to $1,000,000 and nothing else changed. What impact would that have on margin and ROI ? turnover 1 An advantage of ROI is that it Sunnnce the fact iveinn manner rould incrarea inrame tn 125.0nn fan incroca of can now Turnover ROI 0.0898 or 8.98 % Clearly the East Division is earning relatively more on its assets than the West Division. How could the West Division increase its ROI? Select all of the following: Suppose that the East Division increased revenue to $350,000 and nothing else changed. What impact would that have on margin turnover and ROI ? Suppose that the East Division increased ending assets to $1,000,000 and nothing else changed. What impact would that have on margin turnover and ROI ? An advantage of ROI is that it Suppose the East Division manager could increase income to $135,000 (an increase of $40,000) by increasing average operating assets to $1,500,000. Is this a good idea? Yes-income has increased thereby increasing ROI No-the increase in assets has lowered ROI Residual Income ROI has the disadvantage of encouraging managers to sacrifice long-term benefits to increase short- term gain. In particular, a manager with a high ROI may turn down profitable opportunities with AS Lastenload in his Turnover ROI 0.0898 or 8.98 % Clearly the East Division is earning relatively more on its assets than the West Division. How could the West Division increase its ROI? Select all of the following: Suppose that the East Division increased revenue to $350,000 and nothing else changed. What impact would that have on margin turnover and ROI ? Suppose that the East Division increased ending assets to $1,000,000 and nothing else changed. What impact would that have on margin turnover and ROI ? increase An advantage of ROI is that it decrease Suppose the East Division manager could increase income to $135,000 no change bf $40,000) by increasing average operating assets to $1,500,000. Is this a good idea? Recidual Inrama