Question

Jordan Technologies, Inc. has three divisions. Jordan has a desired rate of return of 12.0 percent. The operating assets and income for each division are as follows:

     

Divisions	Operating Assets				Operating Income
Printer	$	630,000			$	104,580
Copier		900,000				99,900
Fax		450,000				63,000
Total	$	1,980,000			$	267,480

Jordan headquarters has $129,000 of additional cash to invest in one of its divisions. The division managers have identified investment opportunities that are expected to yield the following ROIs:

	Expected ROIs for
Divisions	Additional Investments
Printer	13.5	%
Copier	12.5	%
Fax	11.5	%

1. . Calculate the residual income:

1. (1) At the corporate (headquarters) level before the additional investment.

2. (2) At the division level before the additional investment.

3. (3) At the investment level.

4. (4) At the division level after the additional investment.

Answer 1

Divisions	Operating Assets	Operating Income
Printer	630,000	104,580
Copier	900,000	99,900
Fax	450,000	63,000
Total	1,980,000	267,480
Residual income
Net operating income-(Operating assets*min required rate of return*12%)
ans 1
Residual income
267480-(1980000*12%)	29880
ans 2
		in $
Printer	104580-(630000*12%)	28980
Copier	99900-(900000*12%)	-8100
Fax	63000-(450000*12%)	9000
ans 3
Residual income after additional investment
(267480+(129000*13.51%)-((1980000+129000)*12%)		31828
In case taken 13.5% rounded off		31815
ROI=267480/1980000*100	13.51
ans 4
		in $
Printer	(104580+(129000*13.5%))-((630000+129000)*12%)	30915
Copier	(99900+(129000*12.5%))-((900000+129000)*12%)	-7455
Fax	(63000+(129000*11.5%))-((450000+129000)*12%)	8355
If any doubt please comment