8SE - Horngren'S Financial And Managerial Accounting

Question

Refer to the information in Short Exercise S24-7. 

Requirements 

1. Compute each division’s asset turnover ratio (round to two decimal places). Interpret your results. 

2. Use your answers to Requirement 1, along with the profit margin ratio, to recalculate ROI using the expanded formula. Do your answers agree with the basic ROI in Short Exercise S24-7?

Step-by-Step Solution

Answer

The asset turnover ratio of Snow sports is 1.34 times and non-snow sports is 1.39 times. The ROI of Snow sports is 24.12% and non-snow sports is 25.02%

Step 1 Computation of asset turnover ratio

$\begin{array}{c}\mathrm{Assets} \mathrm{Turn} \mathrm{over} \mathrm{Ratio} \mathrm{of} \mathrm{Snow} \mathrm{Sports}=\frac{\mathrm{Net} \mathrm{Sales}}{\mathrm{Average} \mathrm{total} \mathrm{assets}}\\ =\frac{5,500,000}{4,100,000}\\ =1.34\mathrm{times}\end{array}$

$\begin{array}{c}\mathrm{AssetsTurn} \mathrm{over} \mathrm{Ratio} \mathrm{of} \mathrm{Non} \mathrm{Snow} \mathrm{Sports}=\frac{\mathrm{Net} \mathrm{Sales}}{\mathrm{Average} \mathrm{total} \mathrm{assets}}\\ =\frac{8,500,000}{6,100,000}\\ =1.39\mathrm{times}\end{array}$

Step 2 Computation of Return on Investment

$\begin{array}{c}\mathrm{Return} \mathrm{on} \mathrm{Investment} \mathrm{of} \mathrm{Snow} \mathrm{Sports}=\mathrm{Profit} \mathrm{Margin} \mathrm{Ratio}\times \mathrm{Asset} \mathrm{Turn} \mathrm{over} \mathrm{Ratio}\\ =18\times 1.34\\ =24.12\mathrm{\%}\end{array}$

$\begin{array}{c}\mathrm{Return} \mathrm{on} \mathrm{Investment} \mathrm{of} \mathrm{Non} \mathrm{Snow} \mathrm{Sports}=\mathrm{Profit} \mathrm{Margin} \mathrm{Ratio}\times \mathrm{Asset} \mathrm{Turn} \mathrm{over} \mathrm{Ratio}\\ =18\times 1.39\\ =25.02\mathrm{\%}\end{array}$

There is a slight difference between the basic ROI and the ROI computed using the expanded formulae.