Question

Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are given below: Division Queensland New South Wales Sales $ 1,144,000 $ 2,220,000 Average operating assets $ 520,000 $ 600,000 Net operating income $ 125,840 $ 177,600 Property, plant, and equipment (net) $ 252,000 $ 202,000 Required: 1. Compute the rate of return for each division using the return on investment (ROI) formula stated in terms of margin and turnover. 2. Which divisional manager seems to be doing the better job?

Answer 1

Answer:

Outback Brewing, Ltd., of Australia

                                  Queensland     New South Wales

1. Rate of return             5%                           2.16%

2. Based on the computed Rate of Return, Division Queensland seems to be doing a better job than New South Wales

Explanation:

a) Data and Calculations:

                                                              Queensland     New South Wales

Sales                                                       $ 1,144,000        $ 2,220,000 Average operating assets                     $ 520,000            $ 600,000

Net operating income                             $ 125,840             $ 177,600

Property, plant, and equipment (net)    $ 252,000           $ 202,000

Sales margin =                                            11%                            8%

Capital turnover ratio =                              2.2                            3.7

Return on investment (ROI) =                    5%                            2.16%

Sales margin = Net operating income/Sales * 100

Capital turnover ratio = Sales/Average operating assets

ROI = Sales margins divided by the firm's capital turnover ratio