Jones Enterprises is evaluating their divisions over the past few months to determine what department has done the most effective job at meeting or exceeding the Return on Investment (ROI) metric of 16% required by the company. They begin by looking at Sheila's division which purchased a new machine in the last year. This large piece of equipment cost $9,000, generated $3,420 of sales, and incurred $1,904 of operating expenses. Given this information, what is the profit margin of this new equipment, and was this a successful decision?
A) No, this would not be considered successful with a negative return of $0.44.
B) No, this would not be considered successful with a negative return of $0.80.
C) Yes, this would be considered successful with a positive return of $0.44.
D) Yes, this would be considered successful with a positive return of $0.80.

Question

Quizplus · Accepted Answer

This question requires familiarity with the formula for profit margin: Operating Income divided by Sales. In this question, the cost of the equipment is not relevant. To calculate the profit margin, first solve for Operating Income: Sales - Operating Expenses = $3,420 - $1,904 = $1,516. Now, divide this number by Sales = $1,516/$3,420 = 0.4433 or $0.44 is left over as Operating Income or return. This would be considered successful as the purchase of new equipment generated a positive return (Choice C).

Jones Enterprises Is Evaluating Their Divisions Over the Past Few