Question

Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Average operating assets Net operating income Minimum required rate of return Division A $6,200,000 $1,240,000 $ 328 600 19.00% Division B $10.200,000 $5,100,000 $ 948,600 18.60€ Division C $9.300.000 $1,860,000 $ 237,150 16.0046 Required: 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover (Round your answers to 2 decimal places.) Margin Turnover Division Division Division C % 2. Compute the residual income (ons) for each division (Loss amounts should be indicated by a minus sign. Round your "Required rate of return" to 2 decimal places.) Division A Division B Division C s Average operating assets Required rate of return Required operating income Actual operating income Required operating income (above) Residual income (los)

Answer 1

Answer:

Requirement 1:

	Margin(%)	Turnover(times)	ROI(%)
Division A	5.30	5	26.50
Division B	9.30	2	18.60
Division C	2.55	5	12.75

Computation of margin : Net operating income / net sales

	Division A	Division B	Division C
A.Net operating income	328,600	948,600	237,150
B.Net sales	6,200,000	10,200,000	9,300,000
Margin (A/B)	5.3%	9.3%	2.55%

Computation of assets turnover ratio: Net sales/average operating assets

	Division A	Division B	Division C
A.Net sales	6,200,000	10,200,000	9,300,000
B.Average operating assets	1,240,000	5,100,000	1,860,000
Assets turnover (A/B)	5	2	5

Computation of ROI : margin × assets turnover ratio

	Division A	Division B	Division C
A.Margin	5.3%	9.3%	2.55%
B.Assets turnover ratio	5	2	5
Return on investment (A×B)	26.5%	18.6%	12.75%

Requirement 2: Residual income

	Division A	Division B	Division C
A.Average operating assets	1,240,000	5,100,000	1,860,000
B.Required rate of return	19%	18.60%	16%
C.Required operating income (A×B)	235,600	948,600	297,600
D.Actual operating income	328,600	948,600	237,150
E.Residual income (D-C)	93,000	0	(60,450)

Requirement 3.

a. If performance is measured by ROI

Division A	reject
Division B	accept
Division C	accept

	Division A	Division B	Division C
ROI of division	26.5%	18.6%	12.75%
ROI of investment	21%	21%	21%
Decision	Reject	Accept	Accept

b. If performance is measured by Residual income

Division A	accept
Division B	accept
Division C	accept

	Division A	Division B	Division C
Minimum required rate of return	19%	18.6%	16%
ROI of investment	21%	21%	21%
Decision	Accept	Accept	Accept

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Have a great day Champ!