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 $ 7,100,000 $ 1,420,000 $ 440,200 25.00% Division B $ 11,100,000 $ 2,775,000 $ 1,132,200 40.80% Division C $10,200,000 $ 2,040,000 $ 351,900 22.008 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 27% 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. Req 1 Req 2 Req 3A Req 3B Compute the return on investment (ROI) for each division using the formula stated in terms of marg round intermediate calculations. Round your answers to 2 decimal places.) Margin Turnover ROI Division A Division B Division C < Req 1 Req2 >

Answer 1

1)
		Margin	Turnover	ROI
	Division A	6.20%	5	31.00%
	Division B	10.20%	4	40.80%
	Division C	3.45%	5	17.25%
	Margin = Net operating income/sales
	Turnover = sales/Average operating assets
	ROI         = margin * turnover
2)				Division A	Division B	Division C
	Average operating assets			1,420,000	2,775,000	2,040,000
	Required rate of return			25%	40.8%	22%
	required operating income			355000	1132200	448800
	Actual operating income			440,200	1,132,200	351,900
	Required operating income abo			355,000	1,132,200	448,800
	residual income (loss)			85,200	0	-96,900
	Residual income = net operating income -(average operating assets*min
	Required rate of return)
3a)	Division A	Reject
	Division B	Reject
	Division C	Accept
3b)	Division A	Accept
	Division B	Reject
	Division C	Accept