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 $12,480,000 $ 3,120,000 $ 561,600 8.008 Division B $ 28,480,000 $ 7,120,000 $ 512,640 8.50% Division c $ 20,480,000 $ 5,120,000 $ 532,480 10.40% 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 9% 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. Req 1 Req 2 Req ЗА Req 3B 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 % % Division A Division B Division C % % % %

Answer 1

	A	B	C
Sales	12480000	28480000	20480000
Average Operating Assets	3120000	7120000	5120000
Net Operating Income	561600	512640	532480
Minimum required rate of return	8%	8.50%	10.40%
	Margin = Net Operating Income/Sales	Turnover = Sales/Average Operating Assets	ROI = Margin*Turnover
Division A	4.50%	4.00	18.00%
Division B	1.80%	4.00	7.20%
Division C	2.60%	4.00	10.40%
Residual Income = Net Operating Income - Average Operating Assets*Minimum required rate of return
	A	B	C
Residual Income	312000	-92560	0
Division A	Reject	as ROI will reduce
Division B	Accept	as ROI will increase
Division C	Reject	as ROI will reduce
Division A	Accept	As return is higher than minimum required return
Division B	Accept	As return is higher than minimum required return
Division C	Reject	As return is lower than minimum required return