Question

Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is available for each division:

	Fruit Division	Flower Division
Sales Revenue	960,000	1,440,000
Cost of Goods sold and operating Expenses	720,000	1,080,000
Net Operating Income	240,000	360,000
Average Invested Assets	2,000,000	2,000,000

Orange has established a hurdle rate of 7 percent.

Required:
1-a. Compute each division’s return on investment (ROI) and residual income for last year.
1-b. Determine which manager seems to be performing better.
2. Suppose Orange is investing in new technology that will increase each division’s operating income by $130,000. The total investment required is $2,000,000, which will be split evenly between the two divisions. Calculate the ROI and residual income for each division after the investment is made.
3. Determine whether both managers will support the investment.

Answer 1

Fruit Division Average Opearating Assets 2000000 Net operating income 240000 Minimum Required Rate of Return 7.00% ROI : Net Income Operating Assets ROI 12.00% Flower Division 2000000 360000 7.00% 18.00% Residual Income Fruit Division Flower Division Average Operating Assets 2000000 2000000 Minimum Required Rate of Return 7% 7% Minimum Required Return 140000 140000 Net Operating income 240000 360000 Residual income 100000 220000 Answer (A) Fruit Division Flower Division ROI 12.00% 18.00% Residual Income 100000 220000 Which division seems to be Perforaming Better Flower Division

Investing New Technology: Increase in Operating Income by $130000Investmnet Required $2000000 (Split Evenly) Fruit Division Flower Division Average Opearating Assets 3000000 3000000 Net operating income 370000 490000 Minimum Required Rate of Return 7.00% 7.00% ROI : Net Income / Operating Assets ROI 12.33% 16.33% Residual Income Fruit Division Flower Division Average Operating Assets 30000001 3000000 Minimum Required Rate of Return 7% Minimum Required Return 210000 210000 Net Operating income 370000 490000 Residual income 160000 280000 7% Answer Fruit Division ROI 12.33% Residual Income 160000 Which Manager will Accept the investment Fruit Division YES Flower Division NO Flower Division 16.33% 280000