Selected sales and operating data for three divisions of different structural en
ID: 2476802 • Letter: S
Question
Selected sales and operating data for three divisions of different structural engineering firms are given as follows Division A Division C Sales Average operating assets Net operating income Minimum required rate of return Division B $5,000,000 9,000,000 $8,100,000 $1,000,000 $4,500,000 $1,620,000 $ 205,000 729,000 $109,350 16.00% 16.20% 13.00% Required: 1. 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).) Margin Turnover ROI Division A Division B Division C 2. 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).]) Division A Division B Division C Average operating assets Required rate of return Required operating income Actual operating income Required operating income (above) Residual income (loss)Explanation / Answer
ROI computations
:ROI = Margin x Turnover
=Net operating income/Sales x Sales / Average operating assets
Division A:
ROI =$205,000/$ 5,000,000x $ 5,000,000 / $1,000,000
= 0.041 x 5
=20.5%
Division B:ROI =$729,000/$ 9,000,000 x $ 9,000,000 / $4,500,000
= 0.81 x 2
=16.2%
Division C:
ROI =$109,350/ $ 8,100,000 x $ 8,100,000 / $1,620,000
= 0.0135 x5 = 6.75%
Margin
Turnover
ROI
Division A
4.1
5.00
20.50%
Division B
8.1
2.00
16.20%
Division C
1.35
5.00
6.75%
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2.
Division A
Division B
Division C
Average operating Assets
1,000,000
4,500,000
1,620,000
Required rate of return
16.00%
16.20%
13.00%
Required operating income
160,000
729,000
210,600
Actual operating income
205,000
729,000
109,350
Required operating income (above)
160,000
729,000
210,600
Residual income
45,000
-
(101,250)
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3.
Division A
Division B
Division C
Return on investment (ROI)
20.50%
16.20%
6.75%
Therefore, if the division is presented with an investmentopportunity yielding 18%, it probably would
reject
accept
accept
Minimum required return for computing residual income
16%
16.20%
13%
Therefore, if the division is presented with an investmentopportunity yielding 18%, it probably would
Accept
accept
Accept
a.
Division A
reject
Division B
accept
Division C
Accept
b.
Division A
accept
Division B
accept
Division C
accept
If performance is being measured by ROI, both Division A and Division C probably wouldreject the 15% investment opportunity. These divisions' ROIs currently exceed 18%;
If performance is measured by residual income, both Division A and Division B probably wouldaccept the 18% investment opportunity.
Margin
Turnover
ROI
Division A
4.1
5.00
20.50%
Division B
8.1
2.00
16.20%
Division C
1.35
5.00
6.75%
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