John's Mobile Phone Company Uses ROI to Measure Divisional Performance

question 110

Essay

John's Mobile 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 profit and net revenue.The DuPont method is generally used.The company's Phone Accessories Division had the following results for the last two years:
2016 ROI = ($2 000 000/$20 000 000)× ($20 000 000/$10 000 000)= 0.20
2017 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 2017,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 2017.
b.Would there have been any substantial difference if average capital had been used?
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Definitions:

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