Homework Answers
Answer:
Division A:
Sales Margin = Income / Sales Revenue
0.2 = $1,740,000 / Sales Revenue
Sales Revenue = $1,740,000 / 0.2
Sales Revenue = $8,700,000
Capital Turnover = Sales Revenue / Average Investment
1.00 = $8,700,000 / Average Investment
Average Investment = $8,700,000 / 1.00
Average Investment = $8,700,000
Return on Investment = Sales Margin * Capital Turnover
Return on Investment = 0.20 * 1.00
Return on Investment = 0.2 or 20%
Residual Income = Income – Required Return * Average
Investment
Residual Income = $1,740,000 – 0.08 * $8,700,000
Residual Income = $1,740,000 - $696,000
Residual Income = $1,044,000
Division B:
Sales Margin = Income / Sales Revenue
0.2 = $8,280,000 / Sales Revenue
Sales Revenue = $8,280,000 / 0.2
Sales Revenue = $41,400,000
Capital Turnover = Sales Revenue / Average Investment
4.00 = $41,400,000 / Average Investment
Average Investment = $41,400,000 / 1.00
Average Investment = $41,400,000
Return on Investment = Sales Margin * Capital Turnover
Return on Investment = 0.20 * 4.00
Return on Investment = 0.8 or 80%
Residual Income = Income – Required Return * Average
Investment
Residual Income = $8,280,000 – 0.08 * $41,400,000
Residual Income = $8,280,000 - $3,312,000
Residual Income = $4,968,000
Division C:
Sales Margin = Income / Sales
0.25 * Sales = Income
Return on Investment = Sales Margin * Capital Turnover
0.20 = 0.25 * Capital Turnover
Capital Turnover = 0.20 / 0.25
Capital Turnover = 0.8
Capital Turnover = Sales / Average Investment
0.8 = Sales / Average Investment
Average Investment = 1.25 * Sales
Residual Income = Income - Required Return * Average
Investment
$507,000 = 0.25 * Sales - 0.08 * 1.25 * Sales
$507,000 = 0.25 * Sales - 0.10 * Sales
$507,000 = 0.15 * Sales
Sales = $3,380,000
Sales Margin = Income / Sales Revenue
0.25 = Income / $3,380,000
Income = $3,380,000 / 0.25
Income = $13,520,000
Average Investment = 1.25 * Sales
Average Investment = 1.25 * $3,380,000
Average Investment = $4,225,000
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different structural engineering firms are given as follows:
Division A
Division B
Division C
Sales
$
12,840,000
$
28,840,000
$
26,050,000
Average operating assets
$
3,210,000
$
7,210,000
$
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Net operating income
$
564,960
$
346,080
$
755,450
Minimum required rate of return
6.00
%
6.50
%
14.50
%
Required:
1. Compute the return on investment (ROI) for each division
using the formula stated in terms of margin and turnover....
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