The Chewy Chocolate Division of the Delight Confection Company had a rate of return on investment (ROI) of 12 percent (= $1,200,000/$10,000,000) during Year 5, based on sales of $20,000,000. In an effort to improve its performance during Year 6, the company instituted several cost-saving programs, including the substitution of automatic equipment for work previously done by workers and the purchase of raw materials in large quantities to obtain quantity discounts. Despite these cost-saving programs, the company’s ROI for Year 6 was 10 percent (= $1,100,000/$11,000,000), based on sales of $20,000,000.
Required:
a. Break down the ROI for Year 5 and Year 6 into profit margin and investment turnover ratios.
b. Explain the reason for the decrease in ROI between the two years using the results from part a.