10-6 1-3 Exercises EXERCISE 10-6 Evaluating Income (LOI, LO2) Selected sales and

Question

10-6 1-3 Exercises EXERCISE 10-6 Evaluating Income (LOI, LO2) Selected sales and operating data for three divisions of three different service companies are given below: ew Investments Using Return on Investment (ROI) and Residual Division A n B Division C Sales. Average operating assets $6,000,000 $10,000.000$8,000,000 $1,500,000 $300,000 15% $5,000,000 $900,000 18% $2.000,000 $180,000 12% Required: I. Compute the return on investment (ROD for each division, using the formula stated in terms of mar- gin and turnover 2. Compute the residual income for each division. 3. Assume that each division is presented with an investment opportunity that would yield a rate of re- turn of 17%. a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Reject? Why? If performance is bein accept the opportunity? Reject? Why? b. g measured by residual income, which division or divisions will probably EXERCISE 10-7 Effects of Changes in Profits and Assets on Return on Investment (R The Abs Shoppe is a regional chain of health clubs. The managers of the clubs, who have authori investments as needed, are evaluated based largely on return on investment (ROD). The Abs Sho ported the following results for the past year: OI) (L01)

Explanation / Answer

Division A Division B Division C 1 Sales                 6,000,000          10,000,000            8,000,000 2 Average operating assets                 1,500,000            5,000,000            2,000,000 3 Net operating income                    300,000                900,000               180,000 4 Minimum required rate of return 15% 18% 12% 5 Return On Investment(ROI) ( net income/ asset) - (3/2) x 100 20% 18% 9% 6 Normal Operating income ( average asset x minimum return) - ( 2 x 4 )                    225,000                900,000               240,000 7 Residual income ( net operating income- Normal Op. income) - (3- 6)                      75,000                          -                  (60,000) 3 a) Based on ROI, Division A and B can accepeted since it's ROI is more than the yield of investment opportunity. b) Based on Residual income, Division A only can accepeted since it has a positive residual income.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.