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 $12,400,000 $ 3,100,000 $ 508,400 7.000 Division B $ 35,500,000 $ 7,100,000 $ 426,000 7.508 Division c $ 20,400,000 $ 5,100,000 $ 510,000 10.00% 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 8% 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 3A Reg 38 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 K Reg Req 2 >

Answer 1

Solution :

Requirement 1 :

	Margin	Turnover	ROI
Division A	4.10%	4	16.40%
Division B	1.20%	5	6.00%
Division C	2.50%	4	10.00%

Requirement 2 :

	Division A	Division B	Division C
Residual Income	291,400	($ 106,500)	$ 0

Requirement 3A :

Division A	Reject
Division B	Accept
Division C	Reject

Requirement 3B :

Division A	Accept
Division B	Accept
Division C	Reject

Working :

(1) Margin% = Operatig Profit / Sales

	Division A	Division B	Division C
(a) Operating Income	$ 508,400	$ 426,000	$ 510,000
(b) Sales	$ 12,400,000	$ 35,500,000	$ 20,400,000
(c) Margin (a / b)	4.10%	1.20%	2.50%

(2)Turnover Ratio :

Turnover = Sales / Average Operating Assets

	Division A	Division B	Division C
(a) Sales	$ 12,400,000	$ 35,500,000	$ 20,400,000
(b) Avergae Operating Assets	$ 3,100,000	$ 7,100,000	$ 5,100,000
(c) Turnover (a / b)	4	5	4

(3) ROI :

ROI = Operating Income / Average Operating Assets

	Division A	Division B	Division C
(a) Operating Income	$ 508,400	$ 426,000	$ 510,000
(b) Avergae Operating Assets	$ 3,100,000	$ 7,100,000	$ 5,100,000
(c) ROI (a / b)	16.40%	6.00%	10.00%

(4) Residual Income

	Division A	Division B	Division C
(a) Operating Income	$ 508,400	$ 426,000	$ 510,000
(b) Avergae Operating Assets	$ 3,100,000	$ 7,100,000	$ 5,100,000
(c) Required Rate of Return	7.00%	7.50%	10.00%
(d) Target Return (b * c)	$ 217,000	$ 532,500	$ 510,000
(e) Residual Income (a - d)	291,400	($ 106,500)	$ 0

(5) if Performance is measured by ROI :

	Division A	Division B	Division C
ROI of Division	16.40%	6.00%	10.00%
ROI of Investment Opportunity	8.00%	8.00%	8.00%
Decision	Reject	Accept	Reject

(6) if Performance is measured by ROI :

	Division A	Division B	Division C
Minimum Required Rate of Return	7.00%	7.50%	10.00%
ROI of Investment Opportunity	8.00%	8.00%	8.00%
Decision	Accept	Accept	Reject

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