Conner Manufacturing has two major divisions. Management wants to compare their relative performance. Information related to the two divisions is as follows: Division 1:

Sales: $200,000
Expenses: $150,000
Asset investment: $950,000

Division 2:

Sales: $45,000
Expenses: $35,000
Asset investment: $200,000

Based on ROI, which division is more profitable?

a. Division 1
b. Both divisions have the same ROI ratio
c. Division 2

The correct answer is:

Division 1 (a.)

Explanation:

Return on investment (ROI) is a financial ratio used to calculate the benefit earned on an investment cost.

Mathematically, it is represented as:

where:

Net income = Sales - expenses

Original cost of investment = asset invested

Now let us calculate the ROI for each division:

Division 1 :

Net income = Sales - Expenses = 200,000 - 150,000 = $50,000

Asset investment = $950,000

Division 2:

Net income = 45,000 - 35,000 =  $10,000

Asset investment = $200,000

Therefore, based on the ROI for both divisions, Division 1 has a greater ROI (5.26%) than Division 2 (5%) hence, Division 1 is more profitable.

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answer; risk transference;