Selected sales and operating data for three divisions of different structural en
ID: 2585920 • Letter: S
Question
Selected sales and operating data for three divisions of different structural engineering firms are given as follows:
Required:
1. Compute the return on investment (ROI) 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 8% 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?
Division A Division B Division C Sales $ 15,400,000 $ 28,320,000 $ 25,400,000 Average operating assets $ 3,080,000 $ 7,080,000 $ 5,080,000 Net operating income $ 693,000 $ 396,480 $ 736,600 Minimum required rate of return 7.00 % 7.50 % 14.50 %Explanation / Answer
1 & 2:
3. a:
Currenty division A&C earning much higher ROI than 8%, only division B is earning 5.6% ROI, it will accept the opportunity
b:
Division A&B need a minimum return which is less than 8%, by investing in this they will contribute to residual income. hence A&B will accept the opportunity. Division C minimum required return is 14.5% hence it will reject the opportunity
Division A Division B Division C a Sales $ 1,54,00,000 $ 2,83,20,000 $ 2,54,00,000 b Average operating assets $ 30,80,000 $ 70,80,000 $ 50,80,000 c Net operating income $ 6,93,000 $ 3,96,480 $ 7,36,600 d Minimum required rate of return 7 % 7.5 % 14.5 % e= c/a *100 Margin 4.50% 1.40% 2.90% f= a/b Turnover 5 4 5 g= e*f ROI 22.50% 5.60% 14.50% h= b*d Required income 2,15,600 5,31,000 7,36,600 i= c-h Residual income 4,77,400 -1,34,520 0Related Questions
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