Question

Selected operating data for two divisions of Outback Brewing, Limited, of Australia are given below:

Division
Queensland New South Wales
Sales $ 4,000,000 $ 7,000,000
Average operating assets $ 2,000,000 $ 2,000,000
Net operating income $ 360,000 $ 420,000
Property, plant, and equipment (net) $ 950,000 $ 800,000
Required:
Compute each division’s margin, turnover, and return on investment (ROI).

Which divisional manager is doing the better job?

Answer 1

To compute the metrics for each division, we'll work through the calculations for margin, turnover, and return on investment (ROI).

### Step 1: Definitions of Metrics
1. **Margin**: This measures how much of each sales dollar is profit.
\[
\text{Margin} = \frac{\text{Net Operating Income}}{\text{Sales}} \times 100
\]

2. **Turnover**: This measures how efficiently the division uses its assets to generate sales.
\[
\text{Turnover} = \frac{\text{Sales}}{\text{Average Operating Assets}}
\]

3. **Return on Investment (ROI)**: This measures how effectively the division generates profit from its assets.
\[
\text{ROI} = \text{Margin} \times \text{Turnover}
\]

### Step 2: Calculations for Each Division

#### **Division: Queensland**
- **Sales**: $4,000,000
- **Net Operating Income**: $360,000
- **Average Operating Assets**: $2,000,000

1. **Margin**:
\[
\text{Margin} = \frac{360,000}{4,000,000} \times 100 = 9\%
\]

2. **Turnover**:
\[
\text{Turnover} = \frac{4,000,000}{2,000,000} = 2
\]

3. **ROI**:
\[
\text{ROI} = 9\% \times 2 = 18\%
\]

#### **Division: New South Wales**
- **Sales**: $7,000,000
- **Net Operating Income**: $420,000
- **Average Operating Assets**: $2,000,000

1. **Margin**:
\[
\text{Margin} = \frac{420,000}{7,000,000} \times 100 = 6\%
\]

2. **Turnover**:
\[
\text{Turnover} = \frac{7,000,000}{2,000,000} = 3.5
\]

3. **ROI**:
\[
\text{ROI} = 6\% \times 3.5 = 21\%
\]

### Summary of Results

| Division | Margin | Turnover | ROI |
|----------------------|--------|----------|------|
| Queensland | 9% | 2 | 18% |
| New South Wales | 6% | 3.5 | 21% |

### Conclusion
- **Queensland** has a higher margin (9%) but a lower turnover (2) and ROI (18%).
- **New South Wales** has a lower margin (6%) but a significantly higher turnover (3.5) and the highest ROI (21%).

**Final Assessment**: The **New South Wales** division's manager is doing the better job when considering the ROI, even though the margin is lower, the efficiency in using assets to generate sales (turnover) greatly contributes to their overall performance.