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Wize University Managerial Accounting Textbook > Reporting for Control

Return on Investment

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Return on Investment

ROI measures a segments operating income relative to the assets it controls. A high ROI indicates that the segment is utilizing its assets efficiently and converting them to higher profits. One of the limitations of ROI is that it often leads management to make decisions that are not in the best interest of the owners. Certain investments that are profitable and generate positive cash flows are often rejected when ROI is in the decision.










Wize Tip
Operating Income is sometimes called just 'Income' or 'Controllable Margin'

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Example: Return on Investment

The retail segment of ABC Inc. has a minimum required rate of return of 15% on the assets it controls. The segment had sales of $120,000 and earned income of $20,000 this quarter and its average operating assets totalled $100,000.

a. What is the profit margin of the retail segment?

b. What is asset turnover of the retail segment?

c. What is the ROI of the retail segment?

d. What is the residual income of the retail segment after the expansion?

Income - RRR(Assets) = Residual income
20,000 - 0.15(100000) = 5000

Practice: Return on Investment

Gromer Division’s operating results include:
  • Operating Income, $150,000
  • Sales revenue, $1,200,000
  • Operating assets, $500,000
Gromer is considering a project with sales of $120,000, expenses of $84,000, and an investment of $180,000. Gromer’s required rate of return is 15%.
What is Gromer's Margin? (enter your answer as a percentage and omit the symbol, for example 14.5% should be entered as 14.5)