Question
The Woods and Water Company has two operating divisions, the Service Division and the Irrigation Division. The company evaluates the performance of its divisions using
The Woods and Water Company has two operating divisions, the Service Division and the Irrigation Division. The company evaluates the performance of its divisions using the return on investment (ROI) measure. The following information pertains to the two divisions as of the end of the current year:
Service Division Irrigation Division
Total Operating Assets $400,000 $1,000,000
Cost:
Direct materials $40,000 $400,000
Direct Labor $200,000 $200,000
Overhead $25,000 $250,000
Selling & Admin costs $15,000 $150,000
Total costs $280,000 $1,000,000
During the year, the Service Division repaired 8,000 units at an average service fee of $50.00 per unit. The Irrigation Division sold 250 units at an average price of $5,000. The company requires a minimum rate of return of 12%.
Required:
Calculate the Return on Investment (ROI) measure for both divisions and the company as a whole. Based on ROI alone which division had the better performance? Round ROI measures to the nearest whole percent.
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