Problem:
The Woods and Waters Company has two operating divisions, the Service Division and the Irrigation Division.
The company evaluates the performance of its divisions using the Return on Investment (RoI) measure. The following information pertains to the two divisions as of the end of the current year:
During the year, the Service Division repaired 8,000 units at an average service fee of $50.00 per unit. The Irrigation Division sold 250 units at an average price of $5,000. The company requires a minimum rate of return of 12%.
Compute the Return on Investment (ROI) measure for both divisions and the company as a whole. Based on ROI alone which division had the better performance? Round ROI measures to the nearest whole percent. Evaluate this company.
|
|
Service Division |
Irrigation Division |
Total |
|
|
|
|
|
|
|
| Total Operating Assets |
$400,000 |
|
$1,000,000 |
|
$1,400,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Costs |
|
|
|
|
|
|
| Direct Material |
40,000 |
|
400,000 |
|
440,000 |
| Direct Labor |
200,000 |
|
200,000 |
|
400,000 |
| Overhead |
25,000 |
|
250,000 |
|
275,000 |
| Selling/Administrative |
15,000 |
|
150,000 |
|
165,000 |
|
|
|
|
|
|
|
| Total Costs |
280,000 |
|
1,000,000 |
|
1,280,000 |