Question

San Diego Paints is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint Stores (branded retail locations). Consumer paint sold through home improvement stores) Automotive (sales to auto manufacturers) International and Administration The following is selected divisional information for its two largest divisions: Paint Stores and Consumer (Click the icon to view the information.) Read the requirements Management has specified e 21% target rate of retum. Requirement 1. Calculate each division's ROI Round all of your answers to four decimal places Begin by selecting the formula to calculate return on investment (ROI), and then enter the amounts to calculate each division's ROI. (Round your calculations to four decimal places and enter your answer as a percent rounded to two decimal places, X.XX%) = ROI Paint Stores Average total assets Consumer Net sales revenue Requirement 2. C Operating income Begin by selecting Target rate of return rounded to two der Total current liabilities tmargin ratio. Interpret your results. lit margin ratio and then enter the amounts to calculate each division's profil margin ratio (Enter each profit margin ratio as a percent Profit margin ratio Paint Stores % Consumer 96 The division is more profitable on each dollar of sales Requirement 3. Calculate each division's asset turnover ratio. Interpret your results. Begin by selecting the formula to calculate asset tumover ratio, and then enter the amounts to calculate each division's asset turnover ratio (Round your answers to four decimal places X.XXXX.) = Asset turnover ratio Paint Stores Consumer The division is more efficient in generating sales with its average total assets Requirement 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results First, select the expanded ROI formula. ROL Now calculate ROI for each division using the expanded ROI formula. (Enter your answers as a percent rounded to two decimal places, X.XX%.) Using the expanded formula, the ROI for the Paint Stores division is %. Using the expanded formula, the ROI for the Consumer division is The Consumer division's profitability on each dollar of net sales revenue is than the Paint Stores division's profitability. However, the Paint Stores division's efficiency is significantly than the Consumer division's efficiency. These results cause the Paint Stores division's Rol to be the Consumer division's ROL Requirement 5. Calculate each division's RI. Interpret your results, and offer a recommendation for any division with negative RI. First, select the formula to calculate residual income (RI) RI Now calculate each division's RI (Use a minus sign or parentheses to enter negative residual income) The Rl for the Paint Stores division is The RI for the Consumer division is meeting management's target rate of return. A division with a negative RI should consider Requirement 6. Describe some of the factors that management considers when setting its minimum target rate of return. Management different minimum target rates for different divisions. For example, management require a higher target rate of return from a division operating in a riskier business environment Management will need to decide for the calculations and whether it should be net of Dala Table - X 0 Requirements - X Paint Stores Consumer Net Sales Operating Average Total Revenue Income Assets $ 4,030,000 $ 482.000 $ 1.390.000 1,275,000 195.000 1.605,000 1. Calculate sach division's ROI. Round all of your answers to four decimal places 2. Calculate each division's profit margin ratio. Interpret your results 3. Calculate cach division's asset turnover ratio Interpret your results Use the expanded ROI formula to confirm your results from Requirement 1 Interpret your results 5. Calculate each division's RI. Interpret your results, and offer a recommendation for any division with negative RI 6. Describe some of the factors that management considers when setting its minimum target rate of return Print Done CH question

Answer 1

1.

	Operating Income	/	Average Total Assets	=	ROI
Paint Stores	$                          482,000	/	$   1,390,000	=	34.68%
Consumer	$                          196,000	/	$   1,605,000	=	12.21%

2.

	Operating Income	/	Net Sales	=	Profit Margin
Paint Stores	$                          482,000	/	$   4,030,000	=	11.96%
Consumer	$                          196,000	/	$   1,275,000	=	15.37%

Consumer Division is more profitable

3.

	Sales	/	Total Assets	=	Asset Turnover
Paint Stores	$                       4,030,000	/	$   1,390,000	=	2.90
Consumer	$                       1,275,000	/	$   1,605,000	=	0.79

Paint Stores Division is more efficient

4.

	Profit Margin	x	Asset Turnover	=	ROI
Paint Stores	11.96%	x	2.90	=	34.68%
Consumer	15.37%	x	0.79	=	12.21%

The Consumer division's profitability on each dollar of sales is higher than the Paint Stores division's profitability. However, the Paint Stores division's efficiency is significantly higher than the Consumer division's efficiency. These results cause the Paint Stores division's ROI to be higher than the Consumer division's ROI.

5.

	Operating Income	- (	Total Assets	x	Target rate of return	) =	RI
Paint Stores	$                          482,000	- (	$   1,390,000	x	21.00%	) =	$       190,100.00
Consumer	$                          196,000	- (	$   1,605,000	x	21.00%	) =	$     (141,050.00)

Only Paint Store's Division is meeting management's target rate of return. A division with a negative RI should consider eliminating nonproductive assets.

6.
Management may have different minimum target rates for different divisions. For example, management might require a higher target rate of return from a division operating in a riskier business environment. Management will need to decide what assets to include in total assets for the calculations and whether it should be net of accumulated depreciation.

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