Selected sales and operating data for three divisions of different structural en

Question

Selected sales and operating data for three divisions of different structural engineering firms are given a follows: Sales s 15,258,e0 35,250,800 25,250,888 s 3,ese,80es 7,058,000 5,e5e,eee 655,758 528,758732,258 14.50 Net operating income Minimum required rate of return 9.083 9.50% 1 Compute the return on investment (ROD for each division using the formula stated in terms of margin and turnover 2 Compute the residual income (loss) for each division 3. Assume that each division is presented with an investment opportunity that would yield a 10% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity? b. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity? Complete this question by entering your answers in the tabs below Req 1 Req 2 Req 3A Req 3B Compute the return on investment (Ron for each division using the formula stated in terms of margin and turnover. (Oo not round intermediate calculations. Round your answers to 2 decimal places.) Division Division EB Division C Req 2>

Explanation / Answer

ROI=Margin × turnover

=(Net operating income/sales)×(sales/average operating assets)

1.

ROI:

Division A; (655,750/15,250,000)×(15,250,000/3,050,000)=21.50%

Division B; (528,750/35,250,000)×(35,250,000/7,050,000)=7.50%

Division C; (732,250/25,250,000)×(25,250,000/5,050,000)=14.50%

2.

Residual income=net operating income-(average operating assets×hurdle rate)

Division A: $655,750-(3,050,000×9%)=$381,250

Division B: 528,750-(7,050,000×9.50%)=(141,000)

Division C : 732,250-(5,050,000×14.50%)=$0

3. A & B

Division A Division B Division C ROI 21.5% 7.5% 14.5% If opportunity yielding 10% is offered then reject accept reject Minimum required rate of return 9% 9.5% 14.5% If opportunity yielding 10% is offered then accept accept reject

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