Question

Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

	Division A			Division B			Division C
Sales	$	7,400,000		$	11,400,000		$	10,500,000
Average operating assets	$	1,480,000		$	2,850,000		$	2,100,000
Net operating income	$	481,000		$	1,197,000		$	393,750
Minimum required rate of return		28.00	%		42.00	%		25.00	%

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 ROI Division A % times % Division B % times % Division C % times %

2. Compute the residual income (loss) 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 Average operating assets Required rate of return % % % Required operating income Actual operating income Required operating income (above) Residual income (loss)

Answer 1

1
Margin = Net operating income/Sales
Turnover = Sales/Operating assets
ROI = Margin*Turnover
	Division A	Division B	Division C
Sales	7400000	11400000	10500000
Net operating income	481000	1197000	393750
Average operating assets	1480000	2850000	2100000
Margin	6.50%	10.50%	3.75%
Turnover	5.00	4.00	5.00
ROI	32.50%	42.00%	18.75%
	Margin	Turnover	ROI
Division A	6.50%	5.00	32.50%
Division B	10.50%	4.00	42.00%
Division C	3.75%	5.00	18.75%
2
	Division A	Division B	Division C
Average operating assets	1480000	2850000	2100000
Required rate of return	28.00%	42.00%	25.00%
Required operating income	414400	1197000	525000
Actual Net operating income	481000	1197000	393750
Required operating income (above)	414400	1197000	525000
Residual income (loss)	66600	0	-131250