Question

Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A $12,560,000 $ 3,140,000 $ 577,760 7.00% Sales Average operating assets Net operating income Minimum required rate of return Division B $ 35,700,000 $ 7,140,000 $ 428,400 7.50% Division C $20,560,000 $ 5,140,000 $ 555, 120 10.80% points eBook 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 8% 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? Ask Print Complete this question by entering your answers in the tabs below. References Req 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 < Reqi Req2 >

Answer 1

Answer-1)-Division A- Margin – (Net operating income /Sales)*100

= ($577760/$12560000)*100

= 4.6%

Turnover = Sales/ Average operating assets

= $12560000/$3140000

= 4

Return on investment = Margin*Turnover

= 4.6%*4

= 18.4%

Division B- Margin – (Net operating income /Sales)*100

= ($428400/$35700000)*100

= 1.2%

Turnover = Sales/ Average operating assets

= $35700000/$7140000

= 5

Return on investment = Margin*Turnover

= 1.2%*

=6%

Division C- Margin – (Net operating income /Sales)*100

= ($555120/$20560000)*100

= 2.7%

Turnover = Sales/ Average operating assets

= $20560000/$5140000

= 4

Return on investment = Margin*Turnover

= 2.7%*4

= 10.8%

2)- Residual income =Operating income –(Average operating assets*Required rate of return)

Division A= $577760-($3140000*8%)

= $577760-$251200

= $326560

Division B= $428400-($7140000*8%)

= $428400-$571200

= ($142800)

Division C= $555120-($5140000*8%)

= $555120-$411200

= $143920

3)- a)- If performance is being measured by ROI, division A, B & C will probably accept.

b)- If performance is being measured by residual income, division A & C will probably accept and division B reject the opportunity.