Question

Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center). Investment Center Sales Income Average Invested Assets Electronics $ 40,800,000 $ 3,060,000 $ 17,000,000 Sporting goods 17,680,000 2,210,000 13,000,000 Compute profit margin and investment turnover for each department. Which department generates the most net income per dollar of sales? Which department is most efficient at generating sales from average invested assets?

A food manufacturer reports the following for two of its divisions for a recent year.

($ millions)	Beverage Division				Cheese Division
Invested assets, beginning	$	2,688			$	4,481
Invested assets, ending		2,606				4,413
Sales		2,694				3,938
Operating income		362				647

1. Compute return on investment.
2. Compute profit margin.
3. Compute investment turnover for the year.

Answer 1

Average assets = (Beginning assets + Ending Assets)/2

Beverage division = (2688+2606)/2 = 2647

Cheese Division =(4481+4413)/2 = 4447

1. Return on investment = Operating income/Average invested assets

Beverage Division = 362/2647 = 13.68%

Cheese Division = 647/4447 = 14.55%

2. Profit margib = Operating income/sale

Beverage = 362/2694 = 13.44%

Cheese = 647/3938 = 16.43%

Cheese division generates most income per dollar of sales

investment turnover = Sales/average investment

Beverage = 2694/2647 = 1.02 times

Cheese = 3938/4447 = 0.89 times

Beverage is most efficient at generating sales from assets