Response to the following problem:
Pool Accessories, Inc., has two divisions-Furniture and Supplies.
Segmented income statement information for the most recent fiscal year ended December 31 is shown as follows. Assume the Furniture division had average operating assets totaling $6,500,000 for the year, and the Supplies division had average operating assets of $1,750,000.
|
|
Furniture Division
|
Supplies Division
|
|
Sales
|
$3,000,000
|
$1,000,000
|
|
Cost of Goods Sold
|
1,600,000
|
430,000
|
|
Gross Margin
|
$1,400,000
|
$570,000
|
|
Allocated Overhead
|
375,000
|
125,000
|
|
Selling and Administrative Expenses
|
250,000
|
200,000
|
|
Operating Income
|
$775,000
|
$245,000
|
|
Income Tax Expense (30% rate)
|
232,500
|
73,500
|
|
Net Income
|
$542,500
|
$171,500
|
Required:
a. Calculate ROI for each division.
b. What does ROI tell us about each division?
c. Indicate why this measure is useful in evaluating investment centers.