Recreation Equipment Company has several divisions that are investment centers.Data for the Boat Division and the Trailer Division are shown here:
$$\begin{array} { | l | r | r | }
\hline & \text { Boat Division } & \text { Trailer Division } \
\hline \text { Operating income } & \$ 75,000 & \$ 40,000 \
\hline \text { Total assets at Jan. 1 } & \$ 694,000 & \$ 234,000 \
\hline \text { Total assets at Dec. 31 } & \$ 700,000 & \$ 218,000 \
\hline
\end{array}$$ With regard to the efficient use of assets,the Boat Division has a higher return on investment (ROI)because it has the highest operating income.

Question

Recreation Equipment Company has several divisions that are investment centers.Data for the Boat Division and the Trailer Division are shown here:
 $$\begin{array} { | l | r | r | } 
\hline & \text { Boat Division } & \text { Trailer Division } \
\hline \text { Operating income } & \$ 75,000 & \$ 40,000 \
\hline \text { Total assets at Jan. 1 } & \$ 694,000 & \$ 234,000 \
\hline \text { Total assets at Dec. 31 } & \$ 700,000 & \$ 218,000 \
\hline
\end{array}$$ With regard to the efficient use of assets,the Boat Division has a higher return on investment (ROI)because it has the highest operating income.

Quizplus · Accepted Answer

ROI is calculated as Operating Income / Average Total Assets. The Boat Division's average assets are (694,000 + 700,000) / 2 = 697,000, and its ROI is 75,000 / 697,000. The Trailer Division's average assets are (234,000 + 218,000) / 2 = 226,000, and its ROI is 40,000 / 226,000. Without calculating the exact percentages, the conclusion about which division has a higher ROI cannot be made solely based on operating income; the average total assets must also be considered.

Recreation Equipment Company Has Several Divisions That Are Investment Centers