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 $ 12,600,000 $ 3,150,000 $ 516,600 9.00% Division B $ 35,750,000 $ 7,150,000 572,000 9.50 Division C $20,600,000 $ 5,150,000 5 597,480 11.60% 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. Reg 1 Reg 2 Reg 34 Rog 3 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

Answer 1

Answer Margin Turnover Division A Division B Division C 4.10% 1.60% 2.90% ROI 4.00 16.40% 5.00 8.00% 4.00 11.60% 2. Residual Income Division A Division B Division C 233100 -107250 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 12600000 35750000 20600000 Average Opearating Assets 3150000 7150000 5150000 Net operating income 516600 572000 597400 Minimum Required Rate of Return 9.00% 9.50% 11.60% Margin : Net operating Income / Net sales Net operating income 516600 572000 597400 Sales 12600000 35750000 20600000 Margin 4.10% 1.60% 2.90% Assets Turnover ratio : Netsales / Average Opearating Assets Sales 12600000 35750000 20600000 Average Opearating Assets 3150000 7150000 5150000 Assets Turnover ratio : ROI : Margin * Asset Turnover ratio Margin 4.10% 1.60% 2.90% Assets Turnover ratio : ROI : Margin * Asset Turnover ratio 16.40% 8.00% 11.60%

Residual Income Division A Division B Division C Average Operating Assets 3150000 7150000 5150000 Minimum Required Rate of Return 0.09 0.095 0.116 Minimum Required Return 283500 679250 597400 Net Operating income 516600 572000 597400 Residual income 233100 -107250 If Performance is Measured by ROI Division A Division B Division C ROI of the Division 16.40% 8.00% 11.60% ROI of Investment 10% 10% Decision Reject Accept Reject If Performance is Measured by Residula income Division A Division B Division C Minimum Required Rate of Return 9.00% 9.50% 11.60% ROI of Investment 10.00% 10.00% 10.00% Decision Accept Accept Reject 10%