Question

1. Purple Cow Company has three business segments: Jersey, Angus, and Brahma.

Each segment had the following assets and generated the following margins last year:

Jersey Angus Brahma

Segment assets $100,000 $150,000 $300,000

Segment margin $ 45,000 $ 60,000 $102,000

Compute ROI for each segment

If the interest rate used to determine the segment financing charge is 20%, what is the residual income for each segment?

Which segment performed the best; the worst?

Answer 1

A)

	Formula	Jersey	Angus	Brahma
ROI	Segment margin /Segment assets	45000/100000 .45 or 45%	60000/150000 .40 or 40%	102000/300000 .34 or 34%
Residual value	Segment margin -[Segment asset* Hurdle rate]	45000-[100000*.20] 45000- 20000 25000	60000-[150000*.20] 60000- 30000 30000	102000-(300000*.20) 102000- 60000 42000

In terms of ROI ,Jersey has performed Best whereas Brahma has performed worst.

In terms of Residual income , Brahma has performed best whereas Jersey has performed worst.