Question

Selected sales and operating data for three divisions of different structural engineering firms are Division A $7,300,000 $ 1
Division C $10,400,000 $ 2,080,000 379,600 Division B $11,300,000 $ 5,650,000 $ 1,175,200 20.80% Division A $7,300,000 $1,460
Seiectea saies and operaung aald 1or nree uIviSions of Ginerent structurai engineering irms are given as ioiows. Division A $
Req 1 Req 2 Req 3A Req 3B Assume that each division is presented with an investment opportunity that would yield a 27% rate o
Req 1 Req 2 Req 3A Req 3B Assume that each division is presented with an investment opportunity that would yield a 27 % rate
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Answer #1
Part-1: Structural Engineering Firm
Margin Turnover ROI
Division A 6.40% 5 32.00%
Division B 10.40% 2 20.80%
Division C 3.65% 5 18.25%

Formula for refrence

Margin = Net operating income/sales
Turnover = sales/Average operating assets
ROI   = Margin * Turnover
Part-2
Division A Division B Division B
Average operating assets (a) 1,460,000 5,650,000 2,080,000
Required rate of return (b) 27.00% 20.80% 24.00%
Required operating income (c=axb) 394200 1175200 499200
Actual operating income (d) 467,200 1,175,200 379,600
residual income (loss) (d-c) 73,000 0 -119,600
Residual income = Net operating income -(average operating assets*minimum Required rate of return
Part-3(a)
Division A Accept
Division B Accept
Division C Reject
Part-3(b)
Division A Accept
Division B Accept
Division C Reject
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