Question

Compute and interpret the expanded ROI equation (Learning Objective 3)

Rogers, a national manufacturer of lawn-mowing and snow-blowing equipment, segments its business according to customer type: Professional and Residential. Assume the following divisional information was available for the past year (in thousands of dollars):

	Sales	Operating Income	Total Assets
Residential	$ 850,000	$ 68,000	$200,000
Professional	$1,095,000	$153,300	$365,000

Assume that management has a 25% target rate of return for each division.

Requirements

Round all of your answers to four decimal places.

1. Calculate each division’s ROI.

2. Calculate each division’s sales margin. Interpret your results.

3. Calculate each division’s capital turnover. Interpret your results.

4. Use the expanded ROI formula to confirm your results from Requirement 1. What can you conclude?

5. Calculate each division’s residual income (RI). Interpret your results.

Answer 1

Solution 1:

Return on investment - Original Formula
Particulars	Choose Numerator	/	Choose denomerator	=	Return on Investment
Formula	Net Income	/	Average Invested Assets	=	Return on Investment
Residential	$68,000.00	/	$200,000.00	=	34.00%
Professional	$153,300.00	/	$365,000.00	=	42.00%

Solution 2:

Sales Margin
Division	Choose Numerator		/	Choose denominator		=	Profit Margin
	Details	Amount		Details	Amount
Residential	Operating Income	$68,000.00	/	Sales	$850,000.00	=	8.00%
Professional	Operating Income	$153,300.00	/	Sales	$1,095,000.00	=	14.00%

Solution 3:

Capital Turnover
Division	Choose Numerator		/	Choose denominator		=	Investment Turnover
	Details	Amount		Details	Amount
Residential	Sales	$850,000.00	/	Average operating assets	$200,000.00	=	4.25
Professional	Sales	$1,095,000.00	/	Average operating assets	$365,000.00	=	3.00

Solution 4:

Return on Investment - Expended Formula
Division	Profit Margin	*	Investment Turnover	=	Return on Investment
Residential	8.00%	*	4.25		34.0%
Professional	14.00%	*	3.00		42.0%

Solution 5:

Particulars	Residential	Professional
Average investment	$200,000.00	$365,000.00
target return	25%	25%
Target income	$50,000.00	$91,250.00
Operating income	$68,000.00	$153,300.00
Target income	$50,000.00	$91,250.00
Residual income	$18,000.00	$62,050.00