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 $12,920,000 $ 3.230.000 $ 516.800 7.000 Division $ 28,920,000 $ 7,230,000 462.720 7.500 Division $26,150,000 $5,230,000 758.350 14.50 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? Complete this question by entering your answers in the tabs below. Req1 Reg 2 Reg 3A Reg 31 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 Division DI Division C < Prex of 9 Next >

Answer 1

1.Required for Division A,B,C as follows

516,800	12,920,000	4%
462,720	28,920,000	1.6%
758,350	26,150,000	2.9%

2.Residual Income = Operating Income - Required Return × Average Operating Assets

	A	B	C
Residual Income	290,700	-79,530	0 (NIL)

3.

a) Since the income on the basis of ROI is below 8% so all the divisions would accept the investment.

Division	Decision
A	Accept
B	Accept
C	Accept

b) Since B & C would have loss, they would reject.

Division	Decision
A	Accept
B	Reject
C	Reject