Answer (D) is correct . An investment center is responsible for revenues, expenses, and invested capital. Given average plant and equipment of $1,775 and average working capital of $625, the net investment is $2,400. Before-tax profit is $400 ($4,000 sales – $3,525 cost of goods sold – $75 general expenses). If before-tax ROI equals before-tax profit divided by net investment, the answer is 16.67% ($400 ÷ $2,400).
Answer (A) is incorrect because This percentage results from subtracting working capital from plant and equipment in calculating the net investment.
Answer (B) is incorrect because This percentage fails to include average working capital in the total for the net investment.
Answer (C) is incorrect because This percentage results from not subtracting general and administrative expenses in the calculation of before-tax profit.
|
If Hinzel treats the Western Division as an investment center for performance measurement purposes, what is the before-tax return on investment (ROI) for last year?