Two divisions of Oregano Company (Divisions TX and OY) have the same profit margins. Division TX's investment turnover is larger than that of Division OY
(1)2 to 1.0). Income from operations for Division TX is $55,000, and income from operations for Division OY is $43,000. Division TX has a higher return on investment than Division OY by
A) using income from operations as a performance measure
B) comparing the profit margins
C) applying a negotiated price measure
D) using its assets more efficiently in generating sales

Question

Quizplus · Accepted Answer

The fact that Division TX has a larger investment turnover than Division OY implies that it is using its assets more efficiently in generating sales. Therefore, it has a higher return on investment, which is the difference between the income from operations and the investment in assets. Comparing the profit margins or using income from operations as a performance measure does not take into account the difference in asset utilization between the two divisions. Applying a negotiated price measure is not relevant to the information provided.

Two Divisions of Oregano Company (Divisions TX and OY) Have