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 $ 15,300,000 $ 3,060,000 $ 703,800 9.00% Division B $ 35,300,000 $ 7,060,000 $ 529,500 9.50% Division C $20, 240,000 $ 5,060,000 $ 526,240 10.40% 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 10% 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 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

Answer 1

Answer Margin Turnover Division A Division B Division C 4.60% 1.50% 2.60% ROI 5.00 23.00% 5.00 7.50% 4.00 10.40% 2. Residual Income Division A Division B 428400 -141200 Division C Residula Income 3. If Perperformance is measured by ROI Division A Reject Division B Accept Division C Reject 4. If Perperformance is measured by Residual Income Division A Accept Division B Accept Division C Reject

Division A Division B Division C Sales 15300000 35300000 20240000 Average Opearating Assets 3060000 7060000 5060000 Net operating income 703800 529500 526240 Minimum Required Rate of Return 9.00% 9.50% 10.40% Margin : Net operating Income / Net sales Net operating income 703800 5 29500 526240 Sales 15300000 35300000 20240000 Margin 4.60% 1.50% 2.60% Assets Turnover ratio : Netsales / Average Opearating Assets Sales 15300000 35300000 20240000 Average Opearating Assets 3060000 7060000 5060000 Assets Turnover ratio : ROI : Margin * Asset Turnover ratio Margin 4.60% 1.50% 2.60% Assets Turnover ratio : ROI : Margin * Asset Turnover ratio 23.00% 7.50% 10.40%

Residual Income Division A Division B Division C Average Operating Assets 3060000 7060000 5060000 Minimum Required Rate of Return 0.09 0.095 0.104 Minimum Required Return 275400 670700 526240 Net Operating income 703800 529500 526240 Residual income 428400 -1412001 If Per formance is Measured by ROI Division A Division B Division C ROI of the Division 23.00% 7.50% 10.40% ROI of Investment 10% 10% 10% Decision Reject Accept Reject If Per formance is Measured by Residula income Division A Division B Division C Minimum Required Rate of Return 9.00% 9.50% 10.40% ROI of Investment 10.00% 10.00% 10.00% Decision Accept Accept Reject