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Chapter 24: Q6SE (page 1357)

Consider the following data, and determine which of the corporate divisions is more profitable. Explain your reasoning.

Domestic International

Operating income \( 10,000,000 \) 11,000,000

Average total assets 24,000,000 32,000,000

Short Answer

Expert verified

The return on assets of domestic division is 41.67%, international division is 34.38% and domestic division is better than international division.

Step by step solution

01

Computation of return on assets for domestic

ReturnonAssets(Domestic)=OperatingIncomeAveragetotalassets=10,000,00024,000,000×100=41.67%

02

Computation of return on assets for international

ReturnonAssets(International)=OperatingIncomeAveragetotalassets=11,000,00032,000,000×100=34.38%

03

Checking the profitability of the divisions

The domestic division is more profitable as the return on assets of the domestic division is more than that of the international division as computed in steps 2 and step 3.

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Most popular questions from this chapter

Question:Each of the following managers works for a national chain of hotels and has been given certain decision-making authority. Classify each of the managers according to the type of responsibility center he or she probably manages.

a. Manager of the Central Reservation Office

b. Managers of various corporate-owned hotel locations

c. Managers of the Northeast and Southeast Corporate Divisions

d. Manager of the Housekeeping Department at one hotel

e. Manager of the complimentary breakfast buffet at one hotel

Zims, a national manufacturer of lawn-mowing and snow-blowing equipment, segments its business according to customer type: professional and residential. The following divisional information was available for the past year:

Net Sales Revenue Operating Income Average Total Assets

Residential \( 550,000 \) 65,280 $ 192,000

Professional 1,090,000 164,820 402,000

Management has a 26% target rate of return for each division.

Requirements

1. Calculate each division’s ROI. Round all of your answers to four decimal places.

2. Calculate each division’s profit margin ratio. Interpret your results.

3. Calculate each division’s asset turnover ratio. Interpret your results.

4. Use the expanded ROI formula to confirm your results from Requirement 1. What can you conclude?

Well-designed performance evaluation systems accomplish many goals. Describe the potential benefits performance evaluation systems offer.

Sheffield Company manufactures power tools. The Electric Drill Division (an investment center) can purchase the motors for the drills from the Motor Division (another investment center) or from an outside vendor. The cost to purchase from the outside vendor is \(20. The Motor Division also sells to outside customers. The motor needed by the Electric Drill Division sells for \)25 to outside customers and has a variable cost of $15. The Motor Division has excess capacity.

21. If Sheffield Company allows division managers to negotiate transfer prices, what is the minimum amount the manager of the Motor Division should consider?

22. What is the maximum transfer price the manager of the Electric Drill Division should consider?

Usually, which outweighs the other in decentralization—advantages ordisadvantages?
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