Selected operating data for two divisions of Outback Brewing,
Ltd., of Australia are shown below (currency is Australian Currency
dollar, noted here $): Division
Queensland New South
Wales
Sales $4,000,000 $7,000,000
Average operating assets $2,000,000 $2,000,000
Net operating income $360,000 $420,000
Tangible capital assets (net) $950,000 $800,000 Requirement 1: Calculate the rate of return for each division using the return on
investment formula (ROI) indicated in terms of margin and
volume of business. KING
queensland?
New South Wales ? Requirement 2:
Which division manager seems to be doing the best job?
general orientation
Concepts and reason
Sales Revenue: This is the amount received from the sale of goods and services provided. It is the transaction between two parties corresponding to the transfer of goods and services in cash and on credit. The sale is of two types. These are (a) spot sales and (b) forward sales.
Average operating assets: Operating assets are the assets held in the business for the smooth running of business operations. These assets are used to generate the company’s income. Average operating assets are assets held on average over the year. Average operating assets are calculated by dividing the sum of initial operating assets and ending operating assets by 2.
Net operating income: This is the excess of income over expenses. This net operating income is used to make investment decisions. Net operating income is calculated as part of the income statement.
Tangible assets: Tangible assets are one of the sections of assets shown on the balance sheet. In this section, assets held with the intention of using them for a period longer than one accounting cycle or one year.
Fundamentals
Margin: Operating profit margin is calculated to identify business performance before interest earned. It is calculated by dividing the net operating profit by the turnover. The margin percentage is calculated using the following formula:
Revenue: The revenue ratio is used to know the number of times operating assets are used to earn revenue and is calculated by dividing sales by average operating assets. The general rule of analysis is that the higher the ratio, the more the company is able to generate sales from operating assets. Revenue is calculated using the following formula:
Return on investment: indicates the performance of the investment. It is very useful to compare with different investments and select the best investment. Return on investment is calculated by dividing the net profit by the average investment or average operating assets. Return on investment is calculated using the following formula:
Minimum return required: This is the minimum rate that must be achieved on the investment for investors to invest in a certain security or project.
Decision making: This is the process of making a decision by gathering information and evaluating alternative resolutions. It is the process that can help in making considerable decisions, organizing relevant information and defining alternatives.
Step by step
Step 1 of 2
(1)
Use the following table to calculate each division’s rate of return using the return on investment (ROI) formula given in terms of margin and revenue.
Therefore, the rate of return for the Queensland and New South Wales division is 18% and 21% respectively.
Part 1
The rate of return for the Queensland and New South Wales division is 18% and 21% respectively.
Return on investment is the value earned on the investment made. It is calculated as the product of margin and turnover. Margin is calculated by dividing net operating income by sales and revenue is calculated by dividing sales by average operating assets.
For Queensland, sales are $4,000,000, net operating profit is $360,000, and average operating assets are $2,000,000. Calculate margin (9%) by dividing net operating income ($360,000) by sales ($4,000,000). On the other hand, calculate revenue (200%) by dividing sales ($4,000,000) by average operating assets ($2,000,000). Then multiply the margin (9%) and revenue (200%) to get your return on investment (18%).
For New South Wales, sales are $7,000,000, net operating profit is $420,000, and average operating assets are $2,000,000. Calculate margin (6%) by dividing net operating income ($420,000) by sales ($7,000,000). On the other hand, calculate revenue (350%) by dividing sales ($7,000,000) by average operating assets ($2,000,000). Then multiply the margin (6%) and revenue (350%) to get your return on investment (21%).
Based on the calculated ROI, determine which division manager seems to be doing the best job.
Step 2 of 2
(of them)
Based on the calculations made above, the New South Wales Division Manager is doing a better job.
Part 2
The New South Wales division manager is doing a better job.
The performance of a division can be evaluated by comparing the return on investment of these divisions. We can say that a division is more efficient if it has a better return on investment.
According to the calculations made, the return on investment for Queensland is 18%, while the return on investment for New South Wales is 21%. Across all divisions, New South Wales has a higher ROI than Queensland by 3% (21% – 18%).
So, the New South Wales division manager was doing well to get a higher return for that division than Queensland.
Answer
Part 1
The rate of return for the Queensland and New South Wales division is 18% and 21% respectively.
Part 2
The New South Wales division manager is doing a better job.
answer only
Part 1
The rate of return for the Queensland and New South Wales division is 18% and 21% respectively.
Part 2
The New South Wales division manager is doing a better job.
Margin (%) = Net Operating Income » Sales x 100
Turnover = average turnover of operating assets
Return on investment = average net active operating income
Queensland (S) New South Wales (S) Details Margin Net Operating Income (a) Revenue (b) Margin (A = a/b) 360,000 4,000,000 9.00% 420,000 7,000 000 6.00% Turnover Turnover Turnover (a) Average operating assets (b) Turnover (B = a/b) 4,000,000 2,000,000 200.00% 7,000,000 2,000,000 350.00% Return on investment (AB) 18.00% 21.00%