Question

Orange Corp, has two divisions: Fruit and Flower. The following information for the past year is available for each division Flow $ $ Fra Division 1.400.000 1. ORD.000 360,000 Sales revenue Cost of goods sold and operating expenses Net operating income Average invested assets 2.160000 1.620.000 $ 3.000.000 $ 2,160,000 Orange has established a hurdle rate of 8 percent. Required: 1-a. Compute each division's return on investment (ROI) and residual income for last year. (Enter your ROI answers as a percentage rounded to two decimal places, (..., 12.34% ) Fruit Division Flower Division ROI Residual income (Loss) 1-b. Determine which manager seems to be performing better Ft Division O Flower Division 2. Suppose Orange is investing in new technology that will increase each division's operating income by $146,000. The total investment required is $2.300.000, which will be spit evenly be Calculate the ROI and return on investment for each division of the investment is made answers as a percentage rounded to two decimal places, . 0.1234 should Fruit Division Flower Division ROI Residual income (Loss)

Answer 1

1a). Fruit Division:
ROI = Net Income / Average Invested assets
= $360,000 / $3,000,000 = 0.12 or 12%

Residual Income = Net Income - (Average Invested assets * Hurdle rate)
= $360,000 - ($3,000,000 * 8%)
= $120,000

Flower Division:

ROI = Net Income / Average Invested assets
= $540,000 / $2,160,000 = 0.25 or 25%

Residual Income = Net Income - (Average Invested assets * Hurdle rate)
= $540,000 - ($2,160,000 * 8%)
= $367,200

1b). Flower division is performing better.

2). Fruit Division:
ROI = Net Income / Average Invested assets
= ($360,000 + $146,000) / ($3,000,000 + $2,300,000) = 9.55%

Residual Income = Net Income - (Average Invested assets * Hurdle rate)
= ($360,000 + $146,000) - ($3,000,000 + $2,300,000 )* 8%
= $82,000

Flower Division:

ROI = Net Income / Average Invested assets
= ($540,000 + $146,000) / ($2,160,000 +$2,300,000) = 15.38%

Residual Income = Net Income - (Average Invested assets * Hurdle rate)
= ($540,000 + $146,000) - ($2,160,000 +$2,300,000) * 8%
= $329,200

3). No division will accept the investment because ROI and Residual Income of both division falls due to this investment.