Question

Solomon Company has operating assets of $19,000,000. The company's operating income for the most recent accounting period was $2,620,000. The Dannica Division of Solomon controls $8,170,000 of the company's assets and earned $1,240,000 of its operating income. Solomon's desired ROI is 9 percent. Solomon has $1,120,000 of additional funds to invest. The manager of the Dannica division believes that his division could earn $143,000 on the additional funds. The highest investment opportunity to any of the company's other divisions is 10 percent. Required a. Calculate the ROI of Dannica Division. (1) Before investment opportunity. (2) Only on the new investment opportunity. (3) Dannica total ROI if investment opportunity is accepted. c. Calculate the Dannica Division residual income from the new investment opportunity. If residual income is used as the sole performance measure, would the manager of the Dannica Division be likely to accept or reject the additional funding? Complete this question by entering your answers in the tabs below. Required A Required C Calculate the Dannica Division residual income from the new investment opportunity. If residual income is used as the sole performance measure would the manager of the Dannica Division be likely to accept or reject the additional funding? Residual income Will Dannica Division accept or reject the additional funding? Required A Required c

Answer 1

Part A: ROI before investment ROI of Investment Opportunity ROI if investment opportunity accepted Assets 8,170,000.00 1,120,000.00 9,290,000.00 operating Profit 1,240,000.00 143,000.00 1,383,000.00 ROI 15.18% 12.7796 14.8996 Part C: Residual income 42,200.00 Will Rannico accept or reject the additional Funding Yes Part C Solution: Residual income Operating income-(minimum Required rate of return*average operating assets) =143000 - (9% * 1,120,000) =42200 Required Part Sales $ 318,000.00 ROI 23.40 Operating Assets $ 176,666.67 Operating Income $ 41,340.00 turnover 1.80 residual income $ 11,306.67 Operating Profit margin Desired Rate of return 1796 1396

Required Part Calculation operating profit - Sales x operating Profit Margin. = $318000 X 13") = # 41340 Operating Assets = sales of Turnover. = 318000 / 1.8 = $176, 666.67 WORK TO DO Rol= operating Income operating Assels 41340 176,666.67 = 23.40%. PHONES Residual Income = 41340- (176, 666.67 X 17%) = 11,306.67