Question 5

Refer to the following data regarding the three departments from Diamictite Pty Ltd:

	Bright Diamictite	Standard Diamictite	Dark Diamictite
Total assets	$3,400,000	$3,400,000	$2,000,000
Total liabilities	$2,500,000	$2,750,000	$1,000,000
Revenues	$2,200,000	$2,000,000	$1,500,000
Operating profit	$420,000	$375,000	$250,000

The company uses a required rate of return of 12% for its departments. Management wants to evaluate the performance of its three departments for deciding which departmental manager is to be promoted.

Required

1. Which is the department with (i) the higher Return on Sales (ROS), (ii) the higher Return on Investment (ROI), and (iii) the higher Residual Income (RI)? (10 marks)

2. The board has set a target ROI of 15% for the Dark Diamictite division. What alternatives does the department have for attaining this return? (6 marks)