Answer:
From the example, the answer for(1) = The return of investment of residential division is 31% while return on investment of professional division is = 44% (2)The sales margin for professional division is 16%, while the sales margin for residential division is = 10% (3) The capital turnover of residential division is = 3.10 times and the capital turnover of professional division is 2.75 times (4) Each residential income for both residential and professional are $12,600 and $71, 250.
Now,
Explanation:
Solution
Investment return is the ratio which measures the generated profit from an investment. this is done by dividing net incomes with total assets
Given that:
(1) Calculate each division’s ROI
We calculate the investment on return of residential division where we have an operating costs of $ 63,550 and total assets of $205,000 by applying the formula as shown below.
Now,
ROI = Operating income/Total assets
= $ 63,550/$205,000
= 31%
The return of investment is 31%
We then calculate the investment of returns of professional division where the operating income is $165000 with a total assets of $375,000 by applying the formula as shown below
Now,
ROI = Operating income/Total assets
= $165000/$375,000
=44%
The return on investment is = 44%
(2) Calculate each division’s sales margin.
Calculate margin of sales of residential division where the operating income is $62,550 and the sales total is $635,500
Now,
The sales margin = Operating income / sales
= $62,550/$ 635,500 = 10%
Therefore the sales margin = 10%
Calculate the sales margin of professional division where the operating income is $165,000 and the sales total is $1,031,250
sales margin = Operating income/ sales
= $165,000/ $1,031,250 = 16%
The sales margin is 16%
(3) Calculate each division’s capital turnover
We now calculate the capital turnover of residential division where the sales are $635,500 and assets of total are also $205,000
Now,
The capital turnover = Sales/Total assets
=$635,500 / $205,000
= 3.10
Thus, the capital turnover is = 3.10 times
We now calculate the capital turnover of professional division where total sales are $1,031,250 and assets of total are $375,000 using the formula as shown below.
Capital turnover = Sales/ total assets
=$1,031,250 / $375,000
= 2.75
The capital turnover is 2.75 times
(4) Calculate the investment of return of residential division using the formula as shown below.
ROI = Sales margin * Capital turnover
=10% * 3.10 = 31%
Thus, the return of investment is 31%
Calculate the investment of return of professional division using the formula as shown below.
ROI = Sales margin * Capital turnover
= 16% * 2.75 = 44%
Thus, the return on investment is = 44%
The next step is to calculate the residential income of residential division using the formula as shown below
Now,
RI = Operating income - (The target rate of return * Total assets)
= $63,550 - ($205,000* 25%) = $12,600
Therefore the residential income is = $12,600
Now,
calculate the residential income of professional division using the formula as shown below
Now,
RI = Operating income - (The target rate of return * Total assets)
= $165,000 - ($375,000 * 25%)
= $71, 250
Thus, the residential income is $71, 250
Note: Because the residential income in each department is seen as positive, it can be concluded that each departments are working very well.
