Chapter 22: Divisional Performance Measures

Question 1

Return on investment

Answer 1

= divisional income / divisional investment

Also (divisional income/ divisional revenue) x (divisional revenues/ divisional investment)
Aka return on sales x asset turnover ratio

Question 2

Return on sales

Answer 2

Aka operating profit percentage

= Divisional income / divisional revenue

Each dollar of revenue that before income
Measures efficiency of division and manager’s ability to contain operating expenses

Question 3

Asset turnover ratio

Answer 3

Aka investment turnover ratio

= Divisional revenues / divisional investment

How effectively division’s assets are used to generate revenues

Question 4

Residual Income

Answer 4

= operating income - (investment base x required rate of return)

Adds interest expense back to bet income (net of tax effect) = operating income after taxes without financing accounted for (based on the orgs total asset base)