The denominator in the formula for return on investment calculation is
A) investment center controllable margin.
B) dependent on the specific type of profit center.
C) average investment center operating assets.
D) sales for the period.

Question

Quizplus · Accepted Answer

The denominator in the formula for return on investment calculation is average investment center operating assets, which includes all assets that are under the control of the investment center manager. This includes property, plant, and equipment, inventory, accounts receivable, and other operating assets. The average investment center operating assets are used because it reflects the level of investment required to generate the returns being measured. Choice A is incorrect because investment center controllable margin is the numerator in the return on investment calculation. Choice B is incorrect because the formula for return on investment calculation is consistent across different types of profit centers. Choice D is incorrect because sales for the period are not the appropriate measure to use as the denominator in the return on investment calculation.

The Denominator in the Formula for Return on Investment Calculation