Question

Conner Manufacturing has two major divisions. Management wants to compare their relative performance. Information related to the two divisions is as follows:
Division 1:

Sales: $200,000
Expenses: $150,000
Asset investment: $950,000

Division 2:

Sales: $45,000
Expenses: $35,000
Asset investment: $200,000

Based on ROI, which division is more profitable?

a. Division 1
b. Both divisions have the same ROI ratio
c. Division 2

Answer 1

Answer:

The correct answer is:

Division 1 (a.)

Explanation:

Return on investment (ROI) is a financial ratio used to calculate the benefit earned on an investment cost.

Mathematically, it is represented as:

$ROI = \frac{Net\ Income}{original\ cost\ of\ investment} \times 100$

where:

Net income = Sales - expenses

Original cost of investment = asset invested

Now let us calculate the ROI for each division:

Division 1 :

Net income = Sales - Expenses = 200,000 - 150,000 = $50,000

Asset investment = $950,000

$ROI = \frac{50,000}{950,000} \times 100\ \\\\ROI = 5.26\%$

Division 2:

Net income = 45,000 - 35,000 =  $10,000

Asset investment = $200,000

$ROI = \frac{10,000}{200,000} \times 100\\\\= ROI = 0.05\ \times\ 100\ = 5\%$

Therefore, based on the ROI for both divisions, Division 1 has a greater ROI (5.26%) than Division 2 (5%) hence, Division 1 is more profitable.