Selected sales and operating data for three divisions of different structural en
ID: 2446488 • Letter: S
Question
Selected sales and operating data for three divisions of different structural engineering firms are
given as follows:
Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)
Compute the residual income (loss) for each division. (Loss amounts should be indicated by a minus sign. Round your Required Rate of Return percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)
Assume that each division is presented with an investment opportunity that would yield a 25% rate of return.
If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?
If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?
Selected sales and operating data for three divisions of different structural engineering firms are
given as follows:
Explanation / Answer
Solution :
1.ROI
NET OPERATAING INCOME
X SALES
SALES
AVERAGE OPERATING ASSETS
DIVISION A
401200
X 6800000
6800000
1360000
29.50
DIVISION B
1069200
X 10800000
10800000
2700000
39.60
DIVISION C
311850
X 9900000
990000
1980000
15.75
2. RESIDUAL INCOME
A
B
C
Average operating assets
1360000
270000
1980000
Minimum required rate of return
23%
39.60%
20%
required return
312800
106920
396000
actual return
401200
1069200
311850
residual income
88400
962280
-84150
3.a. Decision based on 25% return on alternative
A
B
C
ROI
29.50
39.60
15.75
Alternative rate of return
25.00
25.00
25.00
Decision (if ROI > rate of return on alternative then reject else accept
reject
reject
Accept
3.b.Decision based on residual income
A
B
C
Minimum required rate of return
23.00
39.60
20.00
Alternative rate of return
25.00
25.00
25.00
Decision (if Minimum required return > rate of return on alternative then reject else accept
accept
reject
Accept
1.ROI
NET OPERATAING INCOME
X SALES
SALES
AVERAGE OPERATING ASSETS
DIVISION A
401200
X 6800000
6800000
1360000
29.50
DIVISION B
1069200
X 10800000
10800000
2700000
39.60
DIVISION C
311850
X 9900000
990000
1980000
15.75
2. RESIDUAL INCOME
A
B
C
Average operating assets
1360000
270000
1980000
Minimum required rate of return
23%
39.60%
20%
required return
312800
106920
396000
actual return
401200
1069200
311850
residual income
88400
962280
-84150
3.a. Decision based on 25% return on alternative
A
B
C
ROI
29.50
39.60
15.75
Alternative rate of return
25.00
25.00
25.00
Decision (if ROI > rate of return on alternative then reject else accept
reject
reject
Accept
3.b.Decision based on residual income
A
B
C
Minimum required rate of return
23.00
39.60
20.00
Alternative rate of return
25.00
25.00
25.00
Decision (if Minimum required return > rate of return on alternative then reject else accept
accept
reject
Accept
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