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Answer 1 | |||
Division A | Division B | Division C | |
Sales revenue | $ 1,285,000 | $ 1,034,000 | $ 1,030,000 |
Less: cost of goods sold | $ 794,000 | $ 759,000 | $ 748,000 |
Less: miscellaneous operating expenses | $ 70,000 | $ 58,000 | $ 59,000 |
Operating profit | $ 421,000 | $ 217,000 | $ 223,000 |
Less: interest and taxes expenses | $ 54,000 | $ 47,000 | $ 47,000 |
Net income | $ 367,000 | $ 170,000 | $ 176,000 |
Net income | $ 367,000 | $ 170,000 | $ 176,000 |
Divided by: Average invested assets | $ 9,338,000 | $ 2,212,000 | $ 3,639,000 |
Return on investment (ROI) | 3.93% | 7.69% | 4.84% |
Answer 2 | |||
Division A | Division B | Division C | |
Average invested assets | $ 9,338,000 | $ 2,212,000 | $ 3,639,000 |
Multiply: hurdle rate | 8.00% | 8.00% | 8.00% |
Finance charges | $ 747,040 | $ 176,960 | $ 291,120 |
Operating profit | $ 421,000 | $ 217,000 | $ 223,000 |
Less: Finance charges | $ 747,040 | $ 176,960 | $ 291,120 |
Residual Income (Loss) | $ (326,040) | $ 40,040 | $ (68,120) |
Answer 3 | |||
Division A | Division B | Division C | |
Return on investment (ROI) | 3.93% | 7.69% | 4.84% |
Ranking as per ROI (Higher ROI is better.) | Third | First | Second |
Residual Income (Loss) | $ (326,040) | $ 40,040 | $ (68,120) |
Ranking as per Residual Income (Higher Residual Income is better.) | Third | First | Second |
Answer 4 | |||
Net income | $ 510,000 | ||
Divided by: Average invested assets | $ 5,600,000 | ||
Return on investment (ROI) | 9.11% | ||
This is acceptable because the ROI of 9.11% exceeds a hurdle rate of 8%. | Yes |
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