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Chapter 12

Example 1

An investment centre has reported a profit of $280,000. It has the following
assets and liabilities:
$ $

Non-current assets (at NBV) 100,000
Inventory 20,000
Trade receivables 30,000

50,000
Trade payables 8,000
––––––
42,000

–––––––
142,000
–––––––

Calculate the ROI for the division; state any additional information that would
be useful when calculating the ROI.

ROI might be measured as: $28,000/$142,000 = 19.7%.

However, suppose that the centre manager has no responsibility for debt
collection. In this situation, it could be argued that the centre manager is not
responsible for trade receivable, and the centre’ s CE should be $112,000.

If this assumption is used, ROI would be $28,000/$112,000 = 25%.

Illustrations and further practice

Now try the additional example on ROI.

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