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		Operating	Average
	Net Sales	Income	Total Assets
Paint Stores	$3,950,000	$472,000	$1,410,000
Consumer	1,315,000	193,000	1,590,000

Requirement 1. Calculate each division's ROI. Round all of your answers to four decimal places.

Begin by selecting the formula to calculate return on investment (ROI), and then enter the amounts to calculate each division's ROI. (Round your calculations to four decimal places and enter your answer as a percent rounded to two decimal places, X.XX%)

Operating income

/

Average total assets

=

ROI

Paint Stores

472000

/

1410000

=

3.35

%

Consumer

193000

/

1590000

=

12.14

%

Requirement 2. Calculate each division's profit margin ratio. Interpret your results.

Begin by selecting the formula to calculate profit margin ratio, and then enter the amounts to calculate each division's profit margin ratio. (Enter each profit margin ratio as a percent rounded to two decimal places, X.XX%.)

Operating income

/

Net sales

=

Profit margin ratio

Paint Stores

/

=

%

Consumer

/

=

%

The

___________

Consumer

Paint Stores

division is more profitable on each dollar of sales.

Requirement 3. Calculate each division's asset turnover ratio. Interpret your results.

Begin by selecting the formula to calculate asset turnover ratio, and then enter the amounts to calculate each division's asset turnover ratio. (Round your answers to four decimal places, X.XXXX.)

Net sales

/

Average total assets

=

Asset turnover ratio

Paint Stores

/

=

Consumer

/

=

The

Consumer

Paint Stores

division is more efficient in generating sales with its average total assets.

Requirement 4. Use the expanded ROI formula to confirm your results from Requirement 1. Interpret your results.

First, select the expanded ROI formula.

Profit margin ratio

x

Asset turnover ratio

=

ROI

Now calculate ROI for each division using the expanded ROI formula. (Enter your answers as a percent rounded to two decimal places, X.XX%.)

Using the expanded formula, the ROI for the Paint Stores division is__________________

%.

Using the expanded formula, the ROI for the Consumer division is______________

%.

The Consumer division's profitability on each dollar of sales is

higher

lower

than the Paint Stores division's profitability. However, the Paint Stores division's efficiency is significantly

higher

lower

than the Consumer division's efficiency. These results cause the Paint Stores division's ROI to be

fairly similar to

higher than

lower than

the Consumer division's ROI.

Requirement 5. Calculate each division's RI. Interpret your results, and offer a recommendation for any division with negative RI.

First, select the formula to calculate residual income (RI).

Operating income

(

Target rate of return

x

Average total assets

)

=

RI

Now calculate each division's RI. (Use a minus sign or parentheses to enter negative residual income.)

The RI for the Paint Stores division is $

.

The RI for the Consumer division is $

.

Both divisions are

Neither division is

Only the Consumer division is

Only the Paint Stores division is

meeting management's target rate of return. A division with a negative RI should consider

decreasing its long-term debt

decreasing its operating income

eliminating nonproductive assets

.

Requirement 6. Describe some of the factors that management considers when setting its minimum target rate of return.

Management

cannot have

may have

different minimum target rates for different divisions. For example, management

might

would not

require a higher target rate of return from a division operating in a riskier business environment. Management will need to decide

what assets to include in total assets

what liabilities to include in total liabilities

for the calculations and whether it should be net of

accumulated depreciation.

income taxes.

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