Calculate the return on investment for each division. If required, round the ROI to the nearest hundredth of a percent (for example, 16.943% would be rounded to 16.94%).
Mastery Problem: Return on Investment, margin, and turnover
Return on Investment (ROI)
The manager of an investment center should be evaluated based on revenues, costs, and investments. An evaluation based on net income ignores the amount of investment the investment center required. One way to measure operating profit in relation to investment is a calculation called the return on investment.
| One formula for calculating return on investment is: |
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ROI is effective because it takes into consideration the three factors under the control of an investment center manager: revenues, costs, and investments. ROI measures the income (or return) earned on each dollar of investment.
APPLY THE CONCEPTS: Calculating return on investment
The divisional income statements for three divisions of the McLaren Company are shown.
| McLaren Company | |||||||||
| Divisional Income Statements | |||||||||
| For the Year Ending December 31, 2012 | |||||||||
| Division A | Division B | Division C | |||||||
| Sales Revenue | $1,947,000 | $1,197,000 | $594,000 | ||||||
| Operating expenses | (1,148,730) | (897,750) | (314,820) | ||||||
| Operating income before service department charges | $798,270 | $299,250 | $279,180 | ||||||
| Service department charges | (467,280) | (177,156) | (166,320) | ||||||
| Operating income | $330,990 | $122,094 | $112,860 |
Additional financial data from the three divisions of the McLaren Company are shown.
| Division A | Division B | Division C | ||||
| Invested assets | $1,100,000 | $665,000 | $450,000 |
Calculate the return on investment for each division. If required, round the ROI to the nearest hundredth of a percent (for example, 16.943% would be rounded to 16.94%).
| Division A | Division B | Division C | |
| Return on investment | % | % | % |
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