question archive Pool Accessories, Inc
Pool Accessories, Inc
Subject:AccountingPrice:2.87 Bought7
Pool Accessories, Inc., has two divisions—Furniture and Supplies. (This is the same company as the previous exercise. This exercise can be assigned independently.) 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.
Pool Accessories, Inc.
Segmented Income Statements
For the Current Fiscal Year Ended December 31
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. What does ROI tell us about each division? Indicate why this measure is useful in evaluating investment centers.
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Answer:
ROI for furniture division= $542500/$6500000*100= 8.34%
ROI for supplies division= $171500/$1750000*100= 9.8%
It tells that more benefits are accrued from supplies division than furniture division.
Explanation
Return on investment (ROI) is a financial ratio used to calculate the benefit an investor will receive in relation to their investment cost. It is most commonly measured as net income divided by the original capital cost of the investment. The higher the ratio, the greater the benefit earned.
ROI calculations are simple and help an investor decide whether to take or skip an investment opportunity. The calculation can also be an indication of how an investment has performed to date. When an investment shows a positive or negative ROI, it can be an important indication to the investor about the value of their investment.
Using an ROI formula, an investor can separate low-performing investments from high-performing investments. With this approach, investors and portfolio managers can attempt to optimize their investments.
