Selected sales and operating data for three dvisions of different structural eng

Question

Selected sales and operating data for three dvisions of different structural engineering firms are given as follows Divisio s 16,250,000 $ 3,250,000 $ 7,250,000 S 5,250,000 $348,800 s 763,758 3638,000 6.00% 6.50% 12.00% the return on investment (ROID 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 I 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? ment opportunity that would yield a 7% rate of return. Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3A Req 38 the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Do not Compute round intermediate calculations. Round your answers to 2 decimal places.) ROI Req2

Explanation / Answer

Req 1 DIV A DIV B DIV C Sales 16,250,000 29,000,000 21,000,000 Average operating assets 3,250,000 7,250,000 5,250,000 Net operating income 763,750 348,000 630,000 Margin ratio 4.70% 1.20% 3% (net income/ sales *100) Assets turnover ratio 5 4 4 (Net sales / Average operating assets) ROI Margin ratio Assets turnover ROI Division A 4.70% 5 23.50% Division B 1.20% 4 4.80% Division C 3% 4 12% Note: ROI= Margin ratio*Assets trunover Req 2: DIV A DIV B DIV C Sales 16,250,000 29,000,000 21,000,000 Average operating assets 3,250,000 7,250,000 5,250,000 Net operating income 763,750 348,000 630,000 Min rate of return 6% 6.50% 12% Target return 195000 471250 630000 (Average operating assets*Min rate of return) Residual income 568,750 -123,250 0 (net inocme-target return) Req 3: Decision on basis of ROI: DivisionA Rejected Division B Accepted Division C Rejected As, the working on the investent yielding lower return than actual yield, the division shall not be interested. Only, the performance of division B will improve. Req 4: Decision based on Residual income: Division A Accepted Division B Accepted Division C Rejected As, the investment yield the return more than the target rate for Division A and B, therefore, it will increase their RI, hence, they accept. Howevver, Division C will reject as its target ROI is 12%

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