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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

How does using the return on investment facilitate comparability between divisions of decentralized companies?

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

To Indicate:

How return on investment helps in comparing the divisions of decentralized companies

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.

Investment center takes care of revenue, cost and investment...

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