The snack Foods Division improved its ROI from 18 percent to 20 percent from Year 1 to Year 2, while the Appliance Division’s ROI dropped from 18 percent to 15 percent. Notice that the margins for both divisions dropped from Year 1 to Year 2. A declining margin could be explained by increasing expenses, by competitive pressures (forcing a decrease in selling prices), or both.
Despite the declining margin, the Snack Foods Division increased its rate of return. This increase resulted from an increase in the turnover rate that more than compensated for the decline in margin. The increase in turnover could be explained by a deliberate policy to reduce inventories (the average assets remained the same for the Snack Foods Division even though sales increased by $10 million).