Mastery Problem: Return on Investment, margin, and turnover Return on Investment (ROI) The manager of an investment center should be evaluated based on revenues, costs, and investments. An evaluation based on net income ignores the amount of investment the investment center required. One way to measure operating profit in relation to investment is a calculation called the return on investment. Operating income One formula for calculating return on investment is: Invested Assets ROI is effective because it takes into consideration the three factors under the control of an investment center manager: revenues, costs, and investments. ROI measures the income (or return) earned on each dollar of investment. APPLY THE CONCEPTS: Calculating return on investment The divisional income statements for three divisions of the Singh Company are shown. Singh Company Divisional Income Statements For the Year Ending December 31, 2012 Division A Division B Division C Sales Revenue $1,947,000 $1,197,000 $594,000 Operating expenses (1,148,730) (897,750) (314,820) Operating income before service department charges $798,270 $299,250 $279,180 Service department charges (467,280) (177,156) (166,320) Operating income $330,990 $122,094 $112,860Additional nancial data from the three divisions of the Singh Compan',r are shown. Division A Division B Division C Invested assets $1,100,000 $655,000 $450,000 Calculate the return on investment for each division. If required, round the R01 to the nearest hundredth ofa percent [for example, 16.04305 would be rounded to 16.94%]. Division A Division B Division (2 Return on investment C] \"In C] \"xi: C] \"In Margin and Turnover One wax.r to analyze the difference in return on investment for each division is to separate the return on investment formula into two calculations: margin and turnover. Margin shows the relationship between operating income and sales. It measures the prot earned for each dollar of salesr which is a measure of V . Turnover shows the relationship between sales and invested assets. It measures how many dollars of sales result from each dollar of invested assets, which is a measure of ' . The formulas for margin and turnover are: Margin = Turnover = APPLY THE CDNCEPTS: Calculating margin and turnover Calculate the margin and the turnover for each division. If required, round margin to the nearest tenth ofa percent [for example, 14.6%) and turnover to two decimal places (for example, 0.82]. Division A Division B Division C The division showing the highest operating protabilitv is Division 7 . The division showing the highest operating efficiency.r is Division 7 . APPLY THE CONCEPTS: Using margin and turnover to calculate return on investment A second wav to calculate return on investment {ROI} is Return on Investment = Margin x TLrnover. Using the margins and turnovers vou recorded above, calculate the return on investment for each division. If required, round the return on investment to the nearest hundredth of a percent {for example, 16.94%]. Division A Division B Division C Return on investment :i \"In :i \"ii:- :i \"xi: APPLY THE CDNCEPTS: Determining which RD] formula to use There are two formulas for calculating ROI: 1. R01 = Operating income [ Invested Assets 2. R01 = Margin x Turnover Why would a company use the second formula {ROI = Margin x Turnover] to calculate ROI? Select the YES or NO to the following statements. El. C. d Margin can be tracked separately. If ROI changes. managers can determine which factor caused overall R01 to change. It is easier to calculate. . Turnover can be tracked separately. Both formulas give exactly the same informationr so there is no reason to use the second formula