Question

A food manufacturer reports the following for two of its divisions for a recent year.

\( million	Beverage Division	Cheese Division
Invested assets, beginning	\)2,662	$4,455
Invested assets, ending	2,593	4,400
Sales	2,681	3,925
Operating Income	349	634

For each division, compute (1) return on investment, (2) profit margin, and (3)

Short answer

Division	Return on investment	Profit margin	Investment turnover
Beverage division	13.27%	13.01%	1.02
Cheese division	14.37%	16.15%	0.89

Step-by-step solution

Definition of Return on Investment

The figure reflects the percentage of invested capital converted into profit is known as return on investment. This metric determines the profitability of the business.

Return on investment

Division	Profit margin	X	Investment Turnover	=	Return on investment
Beverage division	13.01%	X	1.02	=	13.27%
Cheese division	16.15%	X	0.89	=	14.37%

Profit margin

Division	Operating income	/	Sales	X	100	=	Profit margin
Beverage division	349	/	2,681	X	100	=	13.01%
Cheese division	634	/	3,925	X	100	=	16.15%

Investment turnover for the year

Division	Sales	/	Average Assets	=	Investment turnover
Beverage division	2,681	/	$2,627.5	=	1.02
Cheese division	3,925	/	$4,427.5	=	0.89

Working note: Calculation of average assets

Division	Opening Assets	+	Ending Assets	/	2	=	Average assets
Beverage division	2,662	+	2,593	/	2	=	$2,627.5
Cheese division	4,455	+	4,400	/	2	=	$4,427.5