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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

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

To Indicate:

The alternative measure to motivate the manager to accept the new product line and to increase the overall company return

Explanation

The Return on investment for the patio division for the past year is calculated as follows:

    Operating Income (A) $ 3,600,000
    Invested Assets (B) $ 15,000,000
    Return on Investment (ROI) = A/B = 24%

The estimated return on investment after adding the new product line is calculated as follows:

    Operating Income (A) (...

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