Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are given below:
| Division | ||||
| Queensland | New South Wales | |||
| Sales | $ | 928,000 | $ | 1,479,000 |
| Average operating assets | $ | 580,000 | $ | 493,000 |
| Net operating income | $ | 74,240 | $ | 73,950 |
| Property, plant, and equipment (net) | $ | 243,000 | $ | 193,000 |
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?
| Ans. | Division | Margin (a) | Turnover (b) | Return on investment (a*b) | ||
| Queensland | 0.08 | 1.6 | 0.128 | or 12.8% | ||
| New South Wales | 0.05 | 3 | 0.15 | or 15% | ||
| The manager of New South Wales seems to be doing the better job as this division has higher Return on investment. | ||||||
| *Calculations: | ||||||
| Margin = Net operating income / Sales | ||||||
| Queensland | 74240 / 928000 | 0.08 | ||||
| New South Wales | 73950 / 1479000 | 0.05 | ||||
| Turnover = Sales / Average operating assets | ||||||
| Queensland | 928000 / 580000 | 1.6 times | ||||
| New South Wales | 1479000 / 493000 | 3 times | ||||
| Return on investment = Margin * Turnover | ||||||
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