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 divisionโs ROI. Round all of your answers to four decimal places.
2. Calculate each divisionโs profit margin ratio. Interpret your results.
3. Calculate each divisionโs 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 divisionโs 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.