Bob Cellular Phone Uses ROI to Measure Divisional Performance

question 29

Essay

Bob Cellular Phone 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:
Previous Year ROI = ($2,000,000/$20,000,000)× ($20,000,000/$10,000,000)= 0.20
Current Year 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 the current year since it had made an additional investment in the division which was budgeted for a 23 percent ROI.Required:
a.Discuss some factors that may have contributed to the decrease in ROI for the current year.
b.Assume total assets employed are 10% less than total assets.What is the effect of using total assets employed when calculating ROI?

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