Question

Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C $6,100,000 $10,100,000 $9,200,000 $1,525,000 $ 5,050,000 $2,300,000 Sales Average operating assetS Net operating income $ 317,200 $ 929,200 $ 225,400 Minimum required ratee of return 15.00% 18.40% 12.00% 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 17% 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. Req 1 Req 2Req 3AReq 3B 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 Division Division Req 1 Req 2 >

Answer 1

Answer 1.

Division A:

Margin = Net Operating Income / Sales
Margin = $317,200 / $6,100,000
Margin = 5.20%

Turnover = Sales / Average Operating Assets
Turnover = $6,100,000 / $1,525,000
Turnover = 4.00

Return on Investment = Margin * Turnover
Return on Investment = 5.20% * 4.00
Return on Investment = 20.80%

Division B:

Margin = Net Operating Income / Sales
Margin = $929,200 / $10,100,000
Margin = 9.20%

Turnover = Sales / Average Operating Assets
Turnover = $10,100,000 / $5,050,000
Turnover = 2.00

Return on Investment = Margin * Turnover
Return on Investment = 9.20% * 2.00
Return on Investment = 18.40%

Division C:

Margin = Net Operating Income / Sales
Margin = $225,400 / $9,200,000
Margin = 2.45%

Turnover = Sales / Average Operating Assets
Turnover = $9,200,000 / $2,300,000
Turnover = 4.00

Return on Investment = Margin * Turnover
Return on Investment = 2.45% * 4.00
Return on Investment = 9.80%

Answer 2.

Division A:

Residual Income = Net Operating Income - Minimum Required Return * Average Operating Assets
Residual Income = $317,200 - 15.00% * $1,525,000
Residual Income = $88,450

Division B:

Residual Income = Net Operating Income - Minimum Required Return * Average Operating Assets
Residual Income = $929,200 - 18.40% * $5,050,000
Residual Income = $0

Division C:

Residual Income = Net Operating Income - Minimum Required Return * Average Operating Assets
Residual Income = $225,400 - 12.00% * $2,300,000
Residual Income = -$50,600

Answer 3-a.

If rate of return of investment opportunity is 17.00%, then Division with ROI higher than 17.00% will reject this investment opportunity.

So, Division A and Division B will reject this investment opportunity and Division C will accept this investment opportunity.

Answer 3-b.

If rate of return of investment opportunity is 17.00%, then Division with minimum required rate of return higher than 17.00% will reject this investment opportunity.

So, Division B will reject this investment opportunity and Division A and Division C will accept this investment opportunity.