Compute the return on investment (ROI) of each division, and break down each division’s ROI into components that measure operating efficiency and the efficiency in asset utilization.
Buffay Book Company has two divisions: The Brick and Mortar division sells books through more than 100 bookstores throughout the United States; the Internet division was formed 18 months ago and sells books via the Internet. Data for the past year are:
Brick and Mortar Internet
Division Division
Operating assets $ 172,200,000 $ 14,400,000
Total revenues 285,600,000 86,500,000
Net operating income 27,740,000 985,000
Cost of capital 13% 15%
# of full-time equivalent employees 900 360
Compute the return on investment (ROI) of each division, and break down each division’s ROI into components that measure operating efficiency and the efficiency in asset utilization. Based on the information above, would you expect any difference between the ROIs of each division?
Presented below are some average financial statistics (over the past three years) of two of Buffay’s competitors—Bing Bookstore, a largely brick-and-mortar book retailer, and Rainforest.com, which sells books (and all sorts of other things) over the internet. Given these data, how would you suggest improving the ROI of each division of Buffay Book Company? What other information would be helpful in measuring the performance of each division?
Bing Bookstore Rainforest.com
Net operating profit margin 0.0% 1.8%
Operating asset turnover 3.75 4.63
The CFO of Buffay has solicited feedback on how to improve the system of performance measurement at the company, and has received the suggestions below. Evaluate each of the following proposals. Explain how these may (or may not) improve the performance measurement and evaluation system.
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