Wescott Company has three divisions: A, B, and C The company has a hurdle rate o

Question

Wescott Company has three divisions: A, B, and C The company has a hurdle rate of 8 percent Selected operating data for the three divisions are as follows Sales revenue Cost of goods sold Miscellaneous operating expenses Interest and taxes Average invested assets Division A Division B Division C S 1.260,000 939,000 920,000 779,000 689.000 668,000 54,000 42.000 8,473,000 1,977.000 3.254,000 65,000 49,000 53,000 42.000 Wescottis considering an expansion project in the upcoming year that will cost $5. 1 million and return $455,000 per year. The project would be implemented by only one of the three divisions Required 1. Compute the ROl for each division (Do not round your intermediate calculations. Round your t round your intermediate calculations. Round your percentages to 2 decimal places.) ROI Division A Division B Division C 2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign Residual income Division A Division B Division C

Explanation / Answer

A B C Sales Revenue    1,260,000       939,000       920,000 COGS       779,000       689,000       668,000 Mis Operating Exp          65,000          53,000          54,000 Interest and taxes          49,000          42,000          42,000 Net income       367,000       155,000       156,000 Average Invested assets    8,473,000    1,977,000    3,254,000 1) ROI 4.33% 7.84% 4.79% 2) Expected income(assets*8%)       677,840       158,160       260,320 Residual income     (310,840)          (3,160)     (104,320) (net income-exp. Income) 4-a) return on proposed expansion project Return         455,000 cost    5,100,000 return 8.92% 4b) yes, as the return is greater than exp return. 5) A Increase Accept B Increase Accept C Increase Accept

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