Safari Equipment Company has several divisions that are investment centers. Data for the Boat Division and the Trailer Division are shown here: $$\begin{array} { | l | r | r | }
\hline & \text { Boat Division } & \text { Trailer Division } \
\hline \text { Operating income } & \$ 80,000 & \$ 50,000 \
\hline \text { Total assets at Jan. 1 } & \$ 680,000 & \$ 215,000 \
\hline \text { Total assets at Dec .31 } & \$ 780,000 & \$ 200,000 \
\hline
\end{array}$$ Which of the following statements would be the most meaningful interpretation of this data?
A) The Boat Division's performance is better than that of the Trailer Division because it has higher assets.
B) The Boat Division uses its assets less efficiently than the Trailer Division does because it has a lower return on investment.
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 is financially more successful than the Trailer Division because it shows an increase in assets.

Question

Safari Equipment Company has several divisions that are investment centers. Data for the Boat Division and the Trailer Division are shown here: $$\begin{array} { | l | r | r | } 
\hline & \text { Boat Division } & \text { Trailer Division } \
\hline \text { Operating income } & \$ 80,000 & \$ 50,000 \
\hline \text { Total assets at Jan. 1 } & \$ 680,000 & \$ 215,000 \
\hline \text { Total assets at Dec .31 } & \$ 780,000 & \$ 200,000 \
\hline
\end{array}$$ Which of the following statements would be the most meaningful interpretation of this data?
A) The Boat Division's performance is better than that of the Trailer Division because it has higher assets.
B) The Boat Division uses its assets less efficiently than the Trailer Division does because it has a lower return on investment.
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 is financially more successful than the Trailer Division because it shows an increase in assets.

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 (680,000 + 780,000) / 2 = 730,000, and its ROI is 80,000 / 730,000 = 0.1096 or 10.96%. For the Trailer Division, the average assets are (215,000 + 200,000) / 2 = 207,500, and its ROI is 50,000 / 207,500 = 0.2409 or 24.09%. Despite the Boat Division having higher operating income and assets, the Trailer Division uses its assets more efficiently, as indicated by a higher ROI.

Safari Equipment Company Has Several Divisions That Are Investment Centers