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Miami Paints

is a national paint manufacturer and retailer.

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(Click the icon to view additional information.)Assume that management has specified a

18%

target rate of return. Read the requirements

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.

Requirement 1. Calculate each division's ROI.

First enter the formula, then calculate the ROI for each division. (Enter the ROI as a percent rounded to the nearest hundredth of a percentage, X.XX%.)

Operating income

Total assets

=

ROI

Paint Stores

570,000

1,900,000

=

%

Consumer

221,000

2,600,000

=

%

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

Enter the formula, then calculate the sales margin for each division. (Enter the sales margin as a percent rounded to the nearest hundredth of a percentage, X.XX%.)

Operating income

Sales

=

Sales margin

Paint Stores

570,000

3,800,000

=

%

Consumer

221,000

1,300,000

=

%

Interpret your results.

The

Consumer

Division is more profitable on each dollar of sales.

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

First enter the formula, then calculate the capital turnover for each division. (Round to two decimal places.)

Sales

Total assets

=

Capital turnover

Paint Stores

3,800,000

1,900,000

=

times

Consumer

1,300,000

2,600,000

=

times

The

Paint Stores

Division is more efficient in generating sales with its assets.

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

First enter the expanded ROI formula, then calculate the ROI for each division. (Enter the ROI as a percent rounded to the nearest hundredth of a percentage, X.XX%.)

Sales margin

Capital turnover

=

ROI

Paint Stores

15

%

2

=

%

Consumer

17

%

.5

=

%

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

higher

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

higher

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

higher than

the Consumer Division's ROI.

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

First enter the formula, then calculate the RI for each division. (Enter the amount in thousands. Use parentheses or a minus sign for negative residual incomes.)

Operating income

-

(

Total assets

Target rate of return

) =

RI

Paint Stores

570,000

(

1,900,000

18

%

)

=

Consumer

221,000

(

2,600,000

18

%

)

=

Interpret your results and offer recommendations for any division with negative RI.

Only the Paint Stores Division is

meeting management's target rate of return. The

Consumer Division

should work on improving its

capital turnover rate

. Improving this may help the division achieve positive residual income.

Requirement 6. Total asset data were provided in this problem. If you were to gather this information from an annual report, how would you measure total assets? Describe your measurement choices and some of the pros and cons of those choices.

Most companies use the

average

asset balance since the income used in the ROI calculation is earned over the year.

Management must also decide whether they wish to use the gross book value of assets or the net book value of assets.

The

net

book value is often used because it is easily pulled from the balance sheet. However, ROI using that value will artificially rise over time due to

.

Requirement 7. Describe some of the factors that management considers when setting its minimum target rate of return.

Requirement 8. Explain why some firms prefer to use RI rather than ROI for performance measurement.

RI does a better job of

.

Requirement 9. Explain why budget versus actual performance reports are insufficient for evaluating the performance of investment centers.

Investment centers are responsible for

Budget versus actual performance reports are insufficient because they do not measure

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