Question
PPLY THE CONCEPTS: Calculating return on investment The divisional income statements for three divisions of the McLaren Company are shown. McLaren Company Divisional Income Statements
PPLY THE CONCEPTS: Calculating return on investment
The divisional income statements for three divisions of the McLaren Company are shown.
| McLaren Company | |||||||||
| Divisional Income Statements | |||||||||
| For the Year Ending December 31, 20Y8 | |||||||||
| Division A | Division B | Division C | |||||||
| Sales Revenue | $1,560,000 | $782,500 | $504,000 | ||||||
| Operating expenses | (920,400) | (586,875) | (267,120) | ||||||
| Operating income before service department charges | $639,600 | $195,625 | $236,880 | ||||||
| Service department charges | (358,800) | (67,295) | (120,960) | ||||||
| Operating income | $280,800 | $128,330 | $115,920 | ||||||
Additional financial data from the three divisions of the McLaren Company are shown.
| Division A | Division B | Division C | ||||
| Invested assets | $1,040,000 | $626,000 | $420,000 | |||
Calculate the return on investment for each division. If required, round the ROI to the nearest hundredth of a percent (for example, 16.943% would be rounded to 16.94%).
| Division A | Division B | Division C | |
| Return on investment | % | % | % |
Feedback
Divide Operating income by Invested Assets and express it as a percentage, rounded to to two decimal places.
Margin and Turnover
One way 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 profit earned for each dollar of sales, which is a measure of operating profitability . 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 operating efficiency .
The formulas for margin and turnover are:
| Margin | = |
| ||
| Turnover | = |
|
Feedback
The Margin is a measure of income per sales dollar.
Turnover is a measure of sales dollars per asset dollar.
APPLY THE CONCEPTS: Calculating margin and turnover
Calculate the margin and the turnover for each division. If required, round margin to the nearest tenth of a percent (for example, 14.6%) and turnover to two decimal places (for example, 0.82).
| Division A | Division B | Division C | ||||
| Margin | % | % | % | |||
| Turnover | ||||||
The division showing the highest operating profitability is Division C .
The division showing the highest operating efficiency is Division A .
Feedback
For Margin, divide Operating income by Sales Revenue and express it as a percentage, rounded to one decimal place.
For Turnover, divide Sales Revenue by Invested Assets and round to two decimal places (this is NOT a percentage).
APPLY THE CONCEPTS: Using margin and turnover to calculate return on investment
A second way to calculate return on investment (ROI) is Return on Investment = Margin x Turnover. Using the margins and turnovers you 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 | % | % | % |
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