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 Sales revenue Cost of goods sold and operating expenses Net operating income Average invested assets Flower Division 5 1,320,000 1,980,000 990000 1485.000 495,000 330,000 S 5 5,000.000 S ,980,000 Orange has established a hurdle rate of 5 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%.)) Fruit Division Flower Division ROI Residual Income (Loss) 1-b. Determine which manager seems to be performing better. Fruit Division O Flower Division 2. Suppose Orange Is Investing In new technology that will Increase each divislon's operating Income by $142,000. The total Investment required Is $2,100,000, which will be split evenly between the two divislons. Calculate the ROl and return on Investment for each divislon 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%.)) Fruit Division Flower Division ROI Residual Income (Loss) 3. Which manager will accept the Investment. Fruit Division Manager Flower Division Manager

Explanation / Answer

Particulars Fruit Division Flower Division a Net operating income $ 330,000 $ 495,000 b Average Investment asset $      5,000,000 $ 1,980,000 c ROI (a/b) 6.60% 25.00% d Hurdle rate 5.00% 5.00% e Normal Return (b*d) $ 250,000 $ 99,000 f Residual Income (a-e) $ 80,000 $ 396,000 Determine which manager seems to be performing better Flower Division As it has Highest ROI and Residual Income 2 Particulars Fruit Division Flower Division a Net operating income $ 472,000 $ 637,000 b Average Investment asset $      7,100,000 $ 4,080,000 c ROI (a/b) 6.65% 15.61% d Hurdle rate 5.00% 5.00% e Normal Return (b*d) $ 355,000 $ 204,000 f Residual Income (a-e) $          117,000 $ 433,000 Which manager will accept this Flower Division

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