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

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: $ 1,230,000 $ 1,205,000$ 1,228,000 892,000 68,000 56,000 10,895,000 2,635,000 4,332,000 Sales revenue Cost of goods sold 760,000 79,000 63,000 885,000 67,000 56,000 Interest and taxes Average invested assets Wescott is considering an expansion project in the upcoming year that will cost $6.8 milion and return $609,000 per year. The project would be implemented by only one of the three divisions. Required 1. Compute the ROI for each division. (Do not round your intermediate caldulations. Round your percentage answer to 2 decimal places, (.e. 0.1234 should be entered as 12.34%.)) Division A Division B Division 2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign) Division A Division B Division C

Explanation / Answer

Division A Division B Division C Sales revenue 1230000 1205000 1228000 less Cost of goods sold 760000 885000 892000 Gross profit 470000 320000 336000 less Other operating expense 79000 67000 68000 Operating income 391000 253000 268000 Less Interest and taxes 63000 56000 56000 Net income 328000 197000 212000 1 Return on investment = Segment margin / amount invested Division A Division B Division C Operating income 391000 253000 268000 Average invested assets 10895000 2635000 4332000 Return on investment 3.59% 9.60% 6.19% Rank 3 1 2 2 Residual income = Operating income - ( Required rate * total assets) Division A Division B Division C Operating income 391000 253000 268000 Minimum rate 8% 8% 8% Amount invested 10895000 2635000 4332000 Minimum rate *amount invested 871600 210800 346560 Residual income -480600 42200 -78560 3 Rank 3 1 2 4 Return on investment 609000 Capital invested 6800000 Return on asset on proposed expansion 8.96% Yes accepted 5 Division A Increase Division B Decrease Division C Increase 6 Return on investment = Segment margin / amount invested Division A Division B Division C Operating income 1000000 862000 877000 Average invested assets 17695000 9435000 11132000 Return on investment 5.65% 9.14% 7.88% Residual income = Operating income - ( Required rate * total assets) Division A Division B Division C Operating income 1000000 862000 877000 Minimum rate 8% 8% 8% Amount invested 17695000 9435000 11132000 Minimum rate *amount invested 1415600 754800 890560 Residual income -415600 107200 -13560

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