Selected sales and operating data for three divisions of different structural en
ID: 2397522 • Letter: S
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 $12,000,000 $14,000,000 $25,000,000
Average operating assets $3,000,000 $7,000,000 $5,000,000
Net operating income $600,000 $560,000 $800,000
Minimum required rate of return 14% 10% 16%
Required:
1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover.
ANSWER: Division A margin = __________
Division B margin = __________
Division C margin = __________
Division A turnover = __________
Division B turnover = __________
Division C turnover = __________
Division A ROI = __________
Division B ROI = __________
Division C ROI = __________
2. Compute the residual income for each division.
ANSWER: Division A residual income = __________
Division B residual income = __________
Division C residual income = __________
3. Assume that each division is presented with an investment opportunity that would yield a 15% rate of return.
a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Reject?
ANSWER: Division A accept or reject? = __________
Division B accept or reject? = __________
Division C accept or reject? = __________
b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject?
ANSWER: Division A accept or reject? = __________
Division B accept or reject? = __________
Division C accept or reject? = __________
Explanation / Answer
1. computation of return on investment (ROI) for each division
ROI = Net operating income/sales * sales / Average opearating assets
Division A = $600,000/$12,000,000* $12,00,000/3,000,000 = 20%
Division B = $560,000/$14,000,000* $14,00,000/7,000,000 = 8%
Division C = $800,000/$25,000,000* $25,00,000/5,000,000 = 16%
2. Compute the residual income for each division.
3.
a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Reject?
If perfoemance is measured by ROI Division A and C been reject in 15% opportunity. because it exceeds 15%, accepting a new investment with a 15% rate of return would reduce overall ROI. so division B can be accepted at 15% investment opportunity
b. If performance is being measured by Residual income( RI), which division or divisions will probably accept the opportunity? Reject?
Under Residual income, both Division A and B can be accepted with 15% investment opportunity, and by rejecting division C where it exceeds 15 % investment opportunity.
Division A Division B Division C Avg Operating assets 3,000,000 7,000,000 5,000,000 Required rate of return 14% 10% 16% Minimum required return 420,000 700,000 800,000 Actual Operating income 600,000 560,000 800,000 Minimum reqiured return 420,000 700,000 800,000 Residual Income 180,000 -140,000 0Related Questions
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