Hargrave Products has three divisions, which operate autonomously. Their results
ID: 2454296 • Letter: H
Question
Hargrave Products has three divisions, which operate autonomously. Their results for 20X5 were as follows:
East
West
International
Sales
$30,000,000
$40,000,000
$50,000,000
Cost of goods sold
15,000,000
25,000,000
37,000,000
Operating income
4,500,000
4,750,000
5,000,000
Investment base
30,000,000
30,500,000
31,000,000
The company's desired rate of return is 15%.
Required:
a. Compute each division's ROI. Round to three decimal places.
b. Compute each division's residual income.
East
West
International
Sales
$30,000,000
$40,000,000
$50,000,000
Cost of goods sold
15,000,000
25,000,000
37,000,000
Operating income
4,500,000
4,750,000
5,000,000
Investment base
30,000,000
30,500,000
31,000,000
Explanation / Answer
a. ROI = gain from investment / coof investment *100
Division A = 4500,000/30,000,000 *100 = 15%
Division B= 4750,000/30500,000 * 100 = 15.574 %
Division C = 5,000,000/31000,000 * 100 = 16.129 %
b. Residual income = Actual income - ( Cost of investment * desired rate of return)
Division A = 4500,000-(30,000,000* 15 %)= 0
Division B = 4750,000-(30,500,000 * 15%)=175000
Division C = 5000,000-(31,000,000*15%)= 350000
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