Question

Use the following information for the Exercises below.

[The following information applies to the questions displayed below.]

A food manufacturer reports the following for two of its divisions for a recent year.

($millions)	Beverage Division				Cheese Division
Invested assets, beginning	$	2,697			$	4,490
Invested assets, ending		2,611				4,418
Sales		2,699				3,943
Operating income		367				652

Exercise 22-12 Return on investment LO A1, A2

1. Compute return on investment.
2. Compute profit margin.
3. Compute investment turnover for the year.

Compute return on investment. (Enter your answers in millions.)

	Return on Investment Choose Numerator: / Choose Denominator: = Return on Investment Investment Center / = Return on investment Beverage / = Cheese / =

Compute profit margin. (Enter your answers in millions.)

	Profit Margin Choose Numerator: / Choose Denominator: = Profit Margin Investment Center / = Profit margin Beverage / = Cheese / =

Compute investment turnover for the year. (Enter your answers in millions.)

	Investment Turnover Choose Numerator: / Choose Denominator: = Investment Turnover Investment Center / = Investment turnover Beverage / = Cheese / =

Assume that each of the company’s divisions has a required rate of return of 6%. Compute residual income for each division. (Enter your answers in millions.)

	($ millions) Beverage Cheese Targeted return Target income Residual Income Beverage Cheese Residual income

Answer 1

Answer of Part 1:

For Beverage Division:

Average Invested Assets = (Beginning Invested Assets + Ending Invested Assets) /2
Average Invested Assets = ($2,697 + $2,611) /2
Average Invested Assets = $2,654

Return on investment = Net Operating Income / Average Invested Assets
Return on Investment = $367 / $2,654
Return on Investment = 13.83%

For Cheese Division:

Average Invested Assets = (Beginning Invested Assets + Ending Invested Assets) /2
Average Invested Assets = ($4,490 + $4,418) /2
Average Invested Assets = $4,454

Return on investment = Net Operating Income / Average Invested Assets
Return on Investment = $652 / $4,454
Return on Investment = 14.64%

Answer of Part 2:

For Beverage Division:

Profit Margin = Operating Income / Sales
Profit Margin = $367 / $2,699
Profit Margin = 13.60%

For Cheese Division:

Profit Margin = Operating Income / Sales
Profit Margin = $652 / $3,943
Profit Margin = 16.54%

Answer of Part 3:

For Beverages Division:

Investment Turnover = Sales / Average Invested Assets
Investment Turnover = $2,699 / $2,654
Investment Turnover =1.02 times

For Cheese Division:

Investment Turnover = Sales / Average Invested Assets
Investment Turnover = $3,943 / $4,454
Investment Turnover =0.89 times

Answer of Part 4:

For Beverages Division:

Targeted Income = Average Invested Assets * Required Rate of Return
Targeted Income = $2,654*6%
Targeted Income = $159

Residual Income = Targeted Income – Net Income
Residual Income = $159 - $367
Residual Income = -$208

For Cheese Division:

Targeted Income = Average Invested Assets * Required Rate of Return
Targeted Income = $4,454*6%
Targeted Income = $267

Residual Income = Targeted Income – Net Income
Residual Income = $267 - $652
Residual Income = -$385