Question

Check my work Universal Electronics, Inc. (UEI), which started operations one year ago, has two divisions: Consumer and Commercial. Both divisions invest heavily in R&D, which is assumed to benefit five years. R&D spending is made uniformly throughout the year. UEl has a cost of capital of 11 percent. Selected financial information for the two divisions (in thousands of dollars) for the year just completed follows. Sales revenue Divisional income Divisional investment Current liabilities RED Consumer $48,000 9,180 34,000 3,600 3,600 Commercial $76,000 10,125 37,500 3,400 3,600 Required: Evaluate the performance of the two divisions assuming UEI uses return on investment (ROI). ROI of Consumer division ROI of Commercial division Which division performed better?

Answer 1

Computation or evaluation of division’s performance using ROI (return on investment) is shown as follows:

Consumer division ROI = (Divisional income / Divisional investment) * 100

                                       = ($9,180 / $34,000) * 100

                                       = 27%

Commercial division ROI = (Divisional income / Divisional investment) * 100

                                       = ($10,125 / $37,500) * 100

                                       = 27%

Since both the division’s ROI is equivalent to 27% i.e. same hence we can both the division are performing equally well. No one division is better than other.

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