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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Evaluating divisional performance
The three divisions of Dixie Foods are Cereal, Produce, and Snacks. The divisions are structured as investment centers. The following responsihility reports were prepared for the three divisions for the prior year

Assuming that the minimum acceptable rate of return on new projects, is 10%. would all investments that produce a return in excess of 10% be accepted by the divisions?

To determine

Concept Introduction:

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

If all the investment providing more than 10% shall be accepted

Explanation

Division which is making best use of invested assets is identified as follows:

    Cereal Produce Snacks
    Operating Income (A) $ 432,000 $ 960,000 $ 1,080,000

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