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Re: Topic 7 DQ 2
a. Calculate the margin and asset turnover for Centex Yarns’ three divisions. Show that margin × asset turnover equals the return on investment for each division as reported in the text..
Polyester fibers has a margin of 17% and an asset turnover of 1.3, which means it has a return on investment of 22.1% (since margin x asset turnover = ROI). Rope has a margin of 32% and an asset turnover of .8 with an ROI of 25.6%. Nylon fibers has a margin of 10%, an asset turnover of 3.2, and an ROI of 32%.
b. Compare the margin and asset turnover for the three divisions and make suggestions for increasing the return on investment of each division.
Rope has the higher margin, but nylon fibers has the highest ROI due to asset turnover. There is an inverse relationship in all three divisions between margin and asset turnover. If the margin is too high, then the asset turnover becomes too low. Ideally you would like a product that has a high margin and a high asset turnover. If the turnover is too low then there is likely some sort of problem converting the sales, it could be the product is not up to par with the market competition, potentially an issue with marketing the product properly, or some other issue in the management cycle.
Davis C. E., & Davis E. (2020). Managerial Accounting, Enhanced eText (4th ed.). John Wiley & Sons. ISBN-13: 9781119577669