A food manufacturer reports the following for two of its divisions for a recent year. ($millions) Beverage Division Cheese Division
Invested assets, beginning $ 2,662 $ 4,455
Invested assets, ending 2,593 4,400
Sales 2,681 3,925
Operating income 349 634
1. Compute return on investment.
2. Compute profit margin.
3. Compute investment turnover for the year. A food manufacturer reports the following for two of its divisions for a recent year.
Compute return on investment
Return on Investment
Choose Numerator: / Choose Denominator: = Return on Investment
Investment Center / = Return on investment
Beverage / = 0
Cheese / = 0
Compute profit margin.
Profit Margin
Choose Numerator: / Choose Denominator: = Profit Margin
Investment Center / = Profit margin
Beverage / = 0
Cheese / = 0
Compute investment turnover for the year.
Investment Turnover
Choose Numerator: / Choose Denominator: = Investment Turnover
Investment Center / = Investment turnover
Beverage / = 0
Cheese / = 0

1. Computation of the Return on Investment:

= Profit/Average Invested Assets x 100

Beverage Division = $349/$2,627.5 x100 = 13.28%

Cheese Division = $634/$4,427.5 x 100 = 14.32%

2. Computation of the profit margin:

= Operating Income/Sales x 100

Beverage Division = $349/$2,681 x 100 = 13%

Cheese Division = $634/$3,925 x 100 = 16.2%

3. Computation of Investment Turnover:

= Sales/Shareholders' Equity + Debt

= Sales/Assets

Beverage Division = $2,681/$2,627.5 = 1 : 1

Cheese Division = $3,925/$4,427.5 = 0.89 : 1

Shareholders' Equity + Debt = Assets

Explanation:

a) Data:

                                           Beverage Division   Cheese Division  Total

Invested assets, beginning       $ 2,662                  $ 4,455         $ 7,117

Invested assets, ending               2,593                      4,400          6,993

Sales                                              2,681                      3,925          6,606

Operating income                           349                         634            983

Average invested assets             2,627.5                  4,427.5       6,799.5

b) In the balance sheet, the total assets are always equal to the Shareholders' Equity and Total Liabilities.  Since they are equal, the value of the assets can be used to substitute for Shareholders' Equity plus total liabilities.  We have chosen to use the average invested assets for the Beverage and Cheese divisions as this smoothens the changes during the year.

c) The Return on Investment for this company is a profitability ratio which shows the efficiency of the investments made in the Beverage and Cheese divisions.

d) The profit margin per division is the percentage of the operating profit over the sales revenue for the Beverage and Cheese divisions.  It shows how much of the divisional sales revenue was turned into divisional profit.  It is also an efficiency measure that demonstrates management's ability to manage the costs of goods and services and the general costs of running the business, in order to generate enough divisional profits for the company.

e) The Investment Turnover compares the divisional sales revenues with the total investments made in generating the revenue.  It shows the ability of the company's management to generate revenue from business funding for both the Beverage and Cheese divisions.