Question
. Baxter Bros. is a manufacturing company that has two major divisions. Both divisions have requi...
. Baxter Bros. is a manufacturing company that has two major divisions. Both divisions have required a significant investment, and management wants to compare their performance. Below is information related to the two divisions. Division A Division B $30,000 $40,000 $25,000 $35,000 Asset investment $100,000 $100,000 Sales Expenses Management is confused that the ROl seems to be the same for both divisions, and wants a deeper evaluation Which division generates greater profitability per sales dollar?
Answers
Division A:
Operating Income = Sales - Expenses
Operating Income = $30,000 - $25,000
Operating Income = $5,000Profit Margin = Operating Income / Sales
Profit Margin = $5,000 / $30,000
Profit Margin = 0.1667 or 16.67%Division B:
Operating Income = Sales - Expenses
Operating Income = $30,000 - $25,000
Operating Income = $5,000Profit Margin = Operating Income / Sales
Profit Margin = $5,000 / $40,000
Profit Margin = 0.1250 or 12.50%Profit margin of Division A is higher than that of Division B. So, Division A is generating greater profitability per sales dollar.
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