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:

   

Orange has established a hurdle rate of 8 percent.   

Required:
1-a. Compute each division’s return on investment (ROI) and residual income for last year. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

         

1-b. Determine which manager seems to be performing better.

        

   

2. Suppose Orange is investing in new technology that will increase each division’s operating income by $146,000. 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. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

       

3. Which manager will accept the investment.

    

Fruit Division Flower Division Sales revenue $ 1,440,000 $ 2,160,000 Cost of goods sold and operating expenses 1,080,000 1,620,000 Net operating income $ 360,000 $ 540,000 Average invested assets $ 3,000,000 $ 2,160,000

Explanation / Answer

Solution 1a:

Solution 1b:

Flower division manager seems to be performing better.

Solution 2:

Solution 3:

If divisional managers performance are evaluated on the basis of residual income, then both manager will accept the new investment as it is resulting in increase of residual income.

If divisional managers performance are evaluated on the basis of ROI, then Flower division manager will not accept the new investment as his division ROI will decrease from 25% to 20.73%. Further Fruit division manager will accept the new investment as his division ROI will increase from 12% to 12.19%

Return on investment Particulars Choose Numerator / Choose denomerator = Return on Investment Formula Income / Average Invested Assets = Return on Investment Fruit Division $360,000.00 / $3,000,000.00 = 12.00% Flower Division $540,000.00 / $2,160,000.00 = 25.00%

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.