Page 957 - Accounting Principles (A Business Perspective)

25. Responsibility accounting: Segmental analysis

Expanded form of ROI computation The ROI formula breaks into two component parts:
Income Sales
ROI= ×
Sales Investment
The first part of the formula, Income/Sales, is called margin or return on sales. The margin refers to the
percentage relationship of income or profits to sales. This percentage shows the number of cents of profit generated
by each dollar of sales. The second part of the formula, Sales/Investment, is called turnover. Turnover shows the
number of dollars of sales generated by each dollar of investment. Turnover measures how effectively each dollar of

assets was used.
A manager can increase ROI in the following three ways. In Exhibit 208, note the possible outcomes of some of
these strategies to increase ROI.
• By concentrating on increasing the profit margin while holding turnover constant: Pursuing this strategy
means keeping selling prices constant and making every effort to increase efficiency and thereby reduce
expenses.
• By concentrating on increasing turnover by reducing the investment in assets while holding income and

sales constant: For example, working capital could be decreased, thereby reducing the investment in assets.

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