Recreation Equipment Company has several divisions which are investment centers. Data for the Boat Division and the Trailer Division are shown here:
$\begin{array}{|l|r|r|}
\hline & \text { Boat Division } &{\text { Trailer Division }} \
\hline \text { Operating income } & \$ 90,000 & \$ 36,000 \
\hline \text { Total assets at Jan 1 } & \$ 670,000 & \$ 230,000 \
\hline \text { Total assets at Dec } 31 & \$ 710,000 & \$ 220,000 \
\hline
\end{array}$
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Which of the following statements would be the MOST meaningful interpretation of this data?
A) The performance of the Boat Division is better than the Trailer Division because the Boat Division has higher assets.
B) The Trailer Division shows a more efficient use of assets than the Boat Division because it has a higher ROI.
C) The Boat Division shows a more efficient use of assets than the Trailer Division because it has a higher operating income.
D) The Boat Division was more successful financially than the Trailer Division because it shows an increase in assets as contrasted to a reduction of assets in the Trailer Division.

Question

Quizplus · Accepted Answer

To determine the most meaningful interpretation, we calculate the Return on Investment (ROI) for both divisions. ROI is calculated as Operating Income divided by Average Total Assets. For the Boat Division, the average assets are $(670,000 + 710,000) / 2 = 690,000$, and for the Trailer Division, it's $(230,000 + 220,000) / 2 = 225,000$. The ROI for the Boat Division is $90,000 / 690,000 = 0.1304$ or 13.04%, and for the Trailer Division, it's $36,000 / 225,000 = 0.16$ or 16%. Therefore, the Trailer Division shows a more efficient use of assets than the Boat Division, making choice B the most meaningful interpretation.

Recreation Equipment Company Has Several Divisions Which Are Investment Centers