The Water Management Company has two operating divisions, the Service Division and the Irrigation Division. The company evaluates the performance of its divisions using the return on investment (ROI) measure. The following information pertains to the two divisions as of the end of the current year. Service Division Irrigation Division TotalUnits repaired; Units produced and sold 8,000 250 Level of investment in operating assets$400,000 $1,000,000 $1,400,000 Expenses: Direct materials 40,000 400,000 440,000 Direct labor 200,000 200,000 400,000 Overhead 25,000 250,000 275,000 Selling/administrative (S&A) costs 15,000 150,000 165,000 Total
expenses$280,000 $1,000,000 $1,280,000 The average service fee was $50.00 per unit for the Service Division, while the average selling price of an irrigation system was $5,000 for the Irrigation Division. The company requires a minimum return on investment of 12%. Required:Compute the return on investment (ROI) measure for both divisions and the company as a whole. Based on ROI alone, which division had the better performance? (Round ROI measures to the nearest whole percent.)
What will be an ideal response?
ROI measures:
| Service Division | Irrigation Division | Total | |||||||||
| Revenue | $ | 400,000 | $ | 1,250,000 | $ | 1,650,000 | |||||
| Less expenses | $ | 280,000 | $ | 1,000,000 | $ | 1,280,000 | |||||
| Income | $ | 120,000 | $ | 250,000 | $ | 370,000 | |||||
| Divided by investment | $ | 400,000 | $ | 1,000,000 | $ | 1,400,000 | |||||
| Return on investment (ROI) | 30 | % | 25 | % | 26 | % | |||||
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