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 $12,640,000 $ 3,160,000 $ 606,720 10.00% Division B $ 35,800,000 $ 7,160,000 $ 608,600 10.500 Division C $20,640,000 $5,160,000 $ 577,920 1.200 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 11% 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 opportu Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Req 3A Reg 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 Division A Division B Division C ROI 19.20 8.50 11 2016

Answer 1

solution working A 1) ROI В C 12640000 35800000 20640000 sales а net operating income Average operating assets margin=net operating income/sales turnover sales/Average operating assets ROI-Margin x tur nover 606720 577920 608600 3160000 7160000 5160000 C d-b/a e-a/c f-d *e 4.80% 1.70% 2.80% 5.00 4.00 4.00 11.20% 19.20% 8.50% 2) Residual income Average operating assets x Minimum required rate of return Target income net operating incom e Residual income (loss) working A В с 3160000 7160000 5160000 а 10.00% 10.50% 11.20% b 316000 751800 577920 577920 606720 608600 C d c-b 290720 -143200 0 3a) Division with ROI equal to or less than rate of return of investment opportunity will accept Division A Reject Аcсept Division B Division C Reje ct 3b) Division with minimum required return equal to or less than rate of return of investment opportunity will accept Аcсept Аcсept Division A Division B Division C Reject