Selected operating data on the two divisions of York Company are given below:

Exercise 11-10 Computing and Interpreting Return on Investment (ROI) [LO1]

Selected operating data on the two divisions of York Company are given below:

	Division
	Eastern		Western
Sales	$	1,000,000	$	1,750,000
Average operating assets	$	500,000	$	500,000
Net operating income	$	90,000	$	105,000
Property, plant, and equipment	$	250,000	$	200,000

 

Required:
1.	Compute the rate of return for each division using the return on investment (ROI) formula stated in terms of margin and turnover. (Do not round intermediate calculations. Omit the "%" sign in your response.)

	ROI
Eastern division	%
Western division	%

2.	Which divisional manager seems to be doing the better job?
	Western division

Explanation: 1.
ROI computations:

ROI =		Net operating income	×	Sales
		Sales		Average operating assets

Eastern Division:	$90,000	×	$1,000,000	= 9% × 2 = 18%
	$1,000,000		$500,000

                                                                                                                                                                                                                                            

Western Division:	$105,000	×	$1,750,000	= 6% × 3.5 = 21%
	$1,750,000		$500,000

2.

The manager of the Western Division seems to be doing the better job. Although her margin is three percentage points lower than the margin of the Eastern Division, her turnover is higher (a turnover of 3.5, as compared to a turnover of two for the Eastern Division). The greater turnover more than offsets the lower margin, resulting in a 21% ROI, as compared to an 18% ROI for the other division.

Notice that if you look at margin alone, then the Eastern Division appears to be the strongest division. This fact underscores the importance of looking at turnover as well as at margin in evaluating performance in an investment center.