Chapter 24, Problem 11E

To determine

Introduction

Return on Investment Ratio: Return on Investment is a ratio analysis used to evaluate profitability of the concern. Sometimes, the management tries to take some decision regarding investment in assets. So, based on the return received from investments on assets department-wise, they try to take decisions regarding the investment in assets. The higher the ROI percentage, the higher is the preference for investment.

Profit Margin Ratio: It is one of the profitability ratios calculated by dividing net income before tax by sales.

Investment (Assets) turnover ratio: This ratio is used to measure the operating performance. Normally this ratio is calculated by dividing net sales by assets. In this answer, we are considering average assets instead of fixed assets.

To Determine

1. Return on Investment ratio
2. Profit Margin ratio
3. Investment turnover ratio

Answer to Problem 11E

Solution

1. The return of Investment of beverage is 13.28% and cheese is 14.32%. Therefore, ROI of cheese is higher than that of beverage.
2. The profit margin of beverage is 13.02% and cheese is 16.15%. Therefore, the profit margin of cheese is higher than beverage.
3. The Divisional Investment assets turnover ratio of beverage is 1.02 and cheese is 0.08. Therefore, investment turnover ratio of beverage is more than that of cheese.

Explanation of Solution

Explanation

1. To calculate Return on Investment, we need to calculate the Average of assets.

  $AverageAssets=\frac{OpeningBalanceofAssets+ClosingBalanceofAssets}{2}$


  $InvestmentinBeverage=\frac{\$2662+\$2593}{2}=\$2628millions$


  $Investmentin\text{ Cheese}==\frac{\$4455+\$4400}{2}=\$4428millions$

Therefore, Average assets on Investment in beverage Division are $2628 millions and in Cheese division, it is $4428 million.

Now, let us calculate the Return on Investment (ROI).

  $ROI=\frac{OperatingIncome}{AverageAssets}*100$


  $ROIincaseofBeverage=\frac{\$349}{\$2628}*100=13.28\%$


  $ROIincaseof\text{ Cheese}=\frac{\$634}{\$4428}*100=14.32\%$

Hence, ROI of beverage is 13.28% and cheese is 14.32%. Therefore, ROI of cheese is higher than Beverage.

2. Calculation of Profit Margin:

  $ProfitMargin=\frac{OperatingIncome}{Sales}*100$


  $ProfitMarginincaseofBeverage=\frac{\$349millions}{\$2681millions}*100=13.02\%$


  $ProfitMarginincaseof\text{ Cheese}=\frac{\$634millions}{\$3925millions}*100=16.15\%$

Hence, profit margin of beverage division is 13.02% and cheese division is 16.15%. The profit margin of cheese division is higher than beverage division.

3. Calculation of Investment (Assets) Turnover Ratio:

  $AssetsTurnoverRatio=\frac{Sales}{AverageAssets}$


  $AssetsTurnoverRatioforBeverageDivision=\frac{\$2681}{\$2628}=1.02$


  $AssetsTurnoverRatiofor\text{ Cheese }Division=\frac{\$3925}{\$4428}=0.08$

Hence, Asset turnover ratio of beverage division is 1.02 and cheese division is 0.08. Therefore, Asset turnover ratio of beverage division is higher than cheese division.