Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are given below:

Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are given below:

	Division
	Queensland		New South Wales
Sales	$	936,000	$	1,972,000
Average operating assets	$	520,000	$	580,000
Net operating income	$	98,280	$	147,900
Property, plant, and equipment (net)	$	249,000	$	199,000

Required:

1. Compute the rate of return for each division using the return on investment (ROI) formula stated in terms of margin and turnover.

2. Which divisional manager seems to be doing the better job?

Explanation

1.

ROI computations:

ROI =	Net operating income	×	Sales
	Sales		Average operating assets

Queensland Division:

ROI =	$98,280	×	$936,000	= 10.5% × 1.8 = 18.90%
	$936,000		$520,000

New South Wales Division:

ROI =	$147,900	×	$1,972,000	= 7.5% × 3.4 = 25.50%
	$1,972,000		$580,000

2.

The manager of the New South Wales Division seems to be doing the better job. Although the New South Wales Division’s margin is 3 percentage points lower than the margin of the Queensland Division, its turnover is higher (a turnover of 3.4, as compared to a turnover of 1.8 for the Queensland Division). The greater turnover more than offsets the lower margin, resulting in a 25.5% ROI, as compared to an 18.9% ROI for the other division.

Notice that if you look at margin alone, then the Queensland Division appears to be the stronger division. This fact underscores the importance of looking at turnover as well as at margin in evaluating performance in an investment center.

Thanks