   Chapter 14, Problem 10CDQ

Chapter
Section
Textbook Problem

The returns on investment for Shear Co.'s three divisions. North, South, and Midwest are 38%, 30%, and 22%, respectively. In expanding operations, which of Shear Co.'s divisions should be given priority? Explain.

To determine

Concept Introduction:

Cost center:

Cost center incurs costs and does not generate the revenue directlyInvestment Center:

Investment center takes care of revenue, cost and investment

Profit Center:

Profit center generate revenue and incur expenses

Return on investment (ROI):

Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows:

ROI = Operating IncomeAverage total assets

ROI (Expanded)= Operating IncomeSales ×SalesAverage total assets

Or

ROI = Profit Margin Ratio ×Asset Turnover ratio

The division to be given priority for expansion

Explanation

Investment center takes care of revenue, cost and investment.

All the factors of investments centers (revenue, expenses and invested assets) should be considered in computation of return on investment because the return on invested assets should show the analysis of all factors of the investment center...

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