Question

Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are given below: Division Queensland New South Wales Sales $ 1,302,000 $ 2,444,000 Average operating assets $ 620,000 $ 520,000 Net operating income $ 71,610 $ 61,100 Property, plant, and equipment (net) $ 239,000 $ 189,000 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. Consider the following calculations

2. Manager of New South Wales division is doing better.

Explanation:

1.  Queensland division

Margin = Net operating income/Sales

= 71,610/1,302,000

= 5.5%

Turnover = Sales/Average operating assets

= 1,302,000/620,000

= 2.1

ROI = Margin x Turnover

= 5.5% x 2.1

= 11.55%

New South Wales division

Margin = Net operating income/Sales

= 61,100/2,444,000

= 2.5%

Turnover = Sales/Average operating assets

= 2,444,000/520,000

= 4.7

ROI = Margin x Turnover

= 2.5% x 4.7

= 11.75%

2.  Since return on investment (ROI) of New South Wales division is more than return on investment (ROI) of Queensland division, thus it can be concluded that manager of New South Wales division is doing better.