Question

Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Sales Average operating assets Net operating income Minimum required rate of return Division A $ 6,000,000 $ 1,200,000 $ 306,000 20.00% Division B $ 10,000,000 $ 2,500,000 $ 910,000 36.40% Division C $ 9,100,000 $ 1,820,000 $ 213,850 17.00% Required: 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. 2. Compute the residual income (loss) for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 22% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity? b. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Req ЗА Req 3B Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Margin Turnover ROI % Division A Division B Division C % % < Req1 Req 2 >
Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C Sales $ 6,000,000 $ 10,000,000 $ 9,100,000 Average operating assets $ 1,200,000 $ 2,500,000 $ 1,820,000 Net operating income $ 306,000 $ 910,000 $ 213,850 Minimum required rate of return 20.00 % 36.40 % 17.00 % Required: 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. 2. Compute the residual income (loss) for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 22% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity? b. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?

Answer 1

Answer Margin Turnover Division A Division B Division C 5.10% 9.10% 2.35% ROI 5.00 25.50% 4.00 36.40% 5.00 11.75% 2. Residual Income Division A Division B 66000 Division C -95550 Residula Income 3. If Perperformance is measured by ROI Division A Reject Division B Reject Division C Accept | 4. If Perperformance is measured by Residual Income Division A Accept Division B Reject Division C Accept

250000 91000 Division A Division B Division C Sales 6000000 10000000 9100000 Average Opearating Assets 1200000 2500000 1820000 Net operating income 306000 910000213850 Minimum Required Rate of Return 20.00% 36.40% 17.00% Margin : Net operating Income / Net sales Net operating income 306000 910000 213850 Sales 6000000 10000000 9100000 Margin 5.10% 9.10% 2.35% Assets Turnover ratio : Netsales / Average Opearating Assets Sales 6000000 10000000 9100000 Average Opearating Assets 1200000 2500000 1820000 Assets Turnover ratio : ROI : Margin * Asset Turnover ratio Margin 5.10% 9.10% 2.35% Assets Turnover ratio : ROI: Margin * Asset Turnover ratio 25.50% 36.40% 11.75% 10 ELS 51001

0 Residual Income Division A Division B Division C Average Operating Assets 1200000 2500000 1820000 Minimum Required Rate of Return 0.2 0.364 0.17 Minimum Required Return 240000 910000 309400 Net Operating income 306000 910000 213850 Residual income 66000 -95550 If Per formance is Measured by ROI Division A Division B Division C ROI of the Division 25.50% 36.40% 11.75% ROI of Investment 22% 22% 22% Decision Reject Reject Accept If Performance is Measured by Residula income Division A Division B Division C Minimum Required Rate of Return 20.00% 36.40% 17.00% ROI of Investment 22.00% 22.00% 22.00% Decision Accept Reject Accept