Question

Suppose that a division produces an operating profit of $ 500,000 with operating assets averaging $ 2 million. What is the return on the division's investment? Suppose that another division produces operating profit of $ 3 million and operating assets averaging $ 30 million. Calculate the ROI of this division. Which division operates better? Explain your answer?

Answer 1

• All working forms part of the answer
• Working and Answer
  --ROI for both the divisions given is calculated side by side.

Working		Division 1	Division 2
A	Operating Profits	$500,000	$3,000,000
B	Operating Assets	$2,000,000	$30,000,000
C = (A/B) x 100	Return on Investments	25%	10%

• Based on ROI:
  --Division 1 operates better.
  --This is because Division 1 is earning $ 0.25 per $ 1 of Operating assets invested.
  --Division 1’s ROI is MORE than Division 2’s.