Question

Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are given below: Division Queensland New South Wales Sales $ 4,000,000 $ 7,000,000 Average operating assets $ 2,000,000 $ 2,000,000 Net operating income $ 360,000 $ 420,000 Property, plant, and equipment (net) $ 950,000 $ 800,000 Required: 1. Compute the rate of return for each division using the return on investment (ROI) formula stated in terms of margin and turnover. 2. Which divisional manager seems to be doing the better job

Answer 1

Answer:

1. 18% and 21%

2. Queensland

Explanation:

The formula to compute the rate of return in terms of margin and turnover is shown below:

1. For New south wales

Margin = Net operating income ÷ sales

           = $360,000 ÷ $4,000,000

           = 9%

And,

Turnover = sales ÷ average operating assets

               = $4,000,000 ÷ 2,000,000

               = 2

ROI = Margin x turnover

     = 9% × 2

     = 18%

For Queensland

Margin = Net operating income ÷  sales

           = $420,000 ÷ $7,000,000

           = 6%

And,

Turnover = Sales ÷ average operating assets

                = $7,000,000 ÷ 2,000,000

                = 3.5

So,

ROI = Margin × turnover

       = 6% × 3.5

       = 21%

2. Based on Return on enlistment, the Queensland doing the better job as it contains the high return on investment