is a national paint manufacturer and retailer. 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 their two largest? divisions: Paint Stores and Consumer? (in thousands of? dollars).

LOADING...

?(Click the icon to view the? information.)

Assume that management has specified a

2020?%

target rate of return.

Sales

Operating Income

Total Assets

Paint stores. . . .

$3,960,000

$574,200

$1,320,000

Consumer. . . . .

$1,260,000

$195,300

$1,750,000

ound 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 was 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 RI rather than ROI for performance measurement.

9.

Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centers.

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, X.XX%.)

/

=

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, X.XX%.)

/

=

Sales margin

Paint stores

/

=

%

Consumer

/

=

%

Interpret your results.

The

?

Consumer

Paint Stores

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

?

Consumer

Paint Stores

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%.)

x

=

ROI

Paint stores

%

x

=

%

Consumer

%

x

=

%

The Consumer? Division's profitability on each dollar of sales is

?

higher

lower

than the Paint Stores? Division's profitability.? However, the Paint Store? Division's efficiency is significantly

?

higher

lower

than the Consumer? Division's efficiency. These results cause the Paint Stores? Division's ROI to be

?

fairly similar to

higher than

lower than

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

(

x

%

)

=

Consumer

(

x

%

)

=

Interpret your results and offer recommendations for any division with negative RI.

?

Both divisions are

Neither division is

Only the Consumer Division is

Only the Paint Stores Division is

meeting? management's target rate of return. The

?

Consumer Division

Paint Store Division

should work on improving its

?

capital turnover rate

customer service

ROI

sales

total assets

. Improving this may help the division achieve positive residual income.??

Requirement 6. Total asset data was 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

?

average

beginning

ending

asset 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

?

gross

net

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

?

acquisitions of property

cash balance

depreciation

notes receivable

prepaid expenses

.

Requirement 7. Describe some of the factors that management considers when setting its minimum target rate of return.

Requirement 8. Explain why some firms prefer to use RI rather than ROI for performance measurement.

RI does a better job of

?

focusing on stockholders' and creditors rate of return

getting management to make sure their division is profitable

goal congruence

increasing the return on investment

.

Requirement 9. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centers.

Investment centers are responsible for

?

both generating profit and efficiently managing a divison's assets.

efficiently managing a division's assets.

generating profit.

Budget versus actual performance reports are insufficient because they do not measure

?

how efficiently the division uses its assets.

how much income the division generated.