Chapter 24: Q13RQ (page 1355)
What is a key performance indicator?
Answer
KPI is a quantifiable metric that shows how successfully a corporation is reaching important business objectives.
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What is the biggest disadvantage of using ROI to evaluate investment centers?
Question: What is the purpose of a responsibility accounting system?
Using ROI and RI to evaluate investment centers
Tiger Paints is a national paint manufacturer and retailer. The company is segmented into five divisions: Paint Stores (branded retail locations), Consumer (paint sold through home improvement stores), Automotive (sales to auto manufacturers), International, and Administration. The following is selected divisional information for its two largest divisions: Paint Stores and Consumer:
Net Sales Revenue Operating Income Average Total Assets
Paint Stores\( 4,000,000 \) 476,000 $ 1,420,000
Consumer 1,300,000 196,000 1,585,000
Management has specified a 19% target rate of return.
Requirements
1. Calculate each division’s ROI. Round all of your answers to four decimal places.
2. Calculate each division’s profit margin ratio. Interpret your results.
3. Calculate each division’s asset turnover ratio. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.
5. Calculate each division’s RI. Interpret your results, and offer a recommendation for any division with negative RI.
6. Describe some of the factors that management considers when setting its minimum target rate of return.
What is the biggest advantage of using RI to evaluate investment centers?
Zims, a national manufacturer of lawn-mowing and snow-blowing equipment, segments its business according to customer type: professional and residential. The following divisional information was available for the past year:
Net Sales Revenue Operating Income Average Total Assets
Residential \( 550,000 \) 65,280 $ 192,000
Professional 1,090,000 164,820 402,000
Management has a 26% target rate of return for each division.
Requirements
1. Calculate each division’s ROI. Round all of your answers to four decimal places.
2. Calculate each division’s profit margin ratio. Interpret your results.
3. Calculate each division’s asset turnover ratio. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. What can you conclude?
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