Bob's Cellular Phone Company Uses ROI to Measure Divisional Performance

question 36

Essay

Bob's Cellular Phone Company uses ROI to measure divisional performance. Annual ROI calculations for each division have traditionally employed the ending amount of invested capital along with annual operating income and net revenue. The Dupont method is generally used. The company's Phone Accessories Division had the following results for the last two years:
2015 ROI = ($2,000,000/$20,000,000) × ($20,000,000/$10,000,000) = 0.20
2016 ROI = ($2,400,000/$25,000,000) × ($25,000,000/$15,000,000) = 0.16
Corporate management was disappointed in the performance of the division for 2016, since it had made an additional investment in the division that was budgeted for a 23% ROI.
Required:
a.Discuss some factors that may have contributed to the decrease in ROI for 2016.
b.Would there have been any substantial difference if average capital had been used?

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Definitions:

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