Orange Corp. has two divisions: Fruit and Flower. The following information for

Question

Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is available for each division: Fruit Division Flower Division Sales revenue $ 1,800,000 $ 2,700,000 Cost of goods sold and operating expenses 1,440,000 2,025,000 Net operating income $ 360,000 $ 675,000 Average invested assets $ 3,600,000 $ 2,812,500 Orange has established a hurdle rate of 6 percent. Required: 1-a. Compute each division’s return on investment (ROI) and residual income for last year. (Round your "ROI" answers to 2 decimal places. Do not round your intermediate calculations.) 1-b. Determine which manager seems to be performing better. Flower Division Fruit Division 2. Suppose Orange is investing in new technology that will increase each division’s operating income by $133,000. The total investment required is $2,300,000, which will be split evenly between the two divisions. Calculate the ROI and return on investment for each division after the investment is made. (Round your "ROI" answers to 2 decimal places. Do not round your intermediate calculations.) 3. Which manager will accept the investment.

Explanation / Answer

ROI=net icome/average op assets
Fruits ROI=360,000/3600000=10%
Flowers ROI=675,000/2,812,500=24%

RI = Operating Income-(Operating Assets x Target Rate of Return)
Residula income for fruits
=360000-(3600000*6%)=$144,000
Residula income for flowers
=675000-(2812500*6%)=$506,250

Flowers division manager is seems to be doing better

2)ROI for fruits=(360,000+133,000)/(3,600,000+1,150,000)=10.38%

ROT for Flowers=(675,000+133,000)/(2,812,500+1,150,000)=20.39%

ROI for frutis in increased after investment so he accepts

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