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:

Tender Delivery

The process of submitting goods for acceptance under the terms of a contract, specifically in a manner that conforms to the agreement's requirements.

Reasonable Hours

A period deemed acceptable or typical for work, activity, or operation, often within the context of employment or service provision.

Reasonable Period

A time frame considered to be fair and appropriate under the circumstances, often used in legal and contractual contexts.

Bailee

A bailee is a person or entity that temporarily holds property under a bailment agreement, in which physical possession but not ownership of personal property is transferred from one party (the bailor) to another (the bailee) for a specified purpose.