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Safari File Edit View History Bookmarks Window Help # O A z 'O -LO, Tue 4:35 PM Lynette Disla a E ezto.mheducation.com Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division Sales Average operating assets Net operating income Minimum required rate of return Division B $5,800,000 $9,800,000 $8,900,000 $1,450,000 4,900,000 $2,225,000 $ 284,200 872,200 S 191,350 18.00% 17.80% 15.00% Required 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Round your answers to 2 decimal places.) 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" to 2 decimal places.) Division A Division B DivisionC Average operating assets Required rate of return Required operating inco me na Disla ...oc.docx DEC 8Explanation / Answer
Margin = net operating income/ Sales
Turnover = Sales/ Average operating Assets
ROI= Average operating Assets x Turnover
1)
Division
Margin
Turnover
ROI
A
4.90%
4.00
19.60%
B
0.89%
2.00
1.78%
C
2.15%
4.00
8.60%
2)
Residual income = Net operating Income- Required operating Income
Division
A
B
C
Average Operating Assets
1450000
4900000
2225000
(x) required return
18%
18%
15%
Required operating income
261000
872200
333750
Actual operating income
284200
872200
191350
Residual income
23200
0
-142400
3)
Division
A
B
C
Average Operating Assets
1450000
4900000
2225000
(x) required return
20%
20%
20%
Required operating income
290000
980000
445000
Actual operating income
284200
872200
191350
Residual income
-5800
-107800
-253650
All divisions have negative residual income, so all the divisons will be rejected.
Division
Margin
Turnover
ROI
A
4.90%
4.00
19.60%
B
0.89%
2.00
1.78%
C
2.15%
4.00
8.60%
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