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

Explanation / Answer

Fruit division :

ROI = Sales / Invested assets * Profit / sales

= $1440000 / $3000000 * $360000 / $1440000

= 0.48 * 0.25

= 0.12 or 12%

Residual income = $360000 - ($3000000 * 8%)

= $120000.

Flower division:

Return on investment = $2160000 / $2160000 * $540000 / $2160000

= 1 * 0.25

= 25%

Residual income = $540000 - ( $2160000 * 8%)

= $540000 - $172800

= $367200.

2.

Fruit division :

ROI = $1440000 / $2300000 * $506000 / $1440000

= 0.6260 * 0.3513

= 0.2199 or 22%

Residual income = $506000 - ($2300000 * 8%)

= $322000.

Flower division:

ROI = $2160000 / $2300000 * $686000 / $2160000

= 29.83%

Residual income = $686000 - ($2300000 * 8%)

= $502000.

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