Question

Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows:

	Division A		Division B		Division C
Sales revenue	$	1,210,000	$	1,281,000	$	1,316,000
Cost of goods sold		748,000		941,000		956,000
Miscellaneous operating expenses		83,000		71,000		72,000
Interest and taxes		67,000		60,000		60,000
Average invested assets		11,587,000		2,823,000		4,640,000

Wescott is considering an expansion project in the upcoming year that will cost $7.2 million and return $653,000 per year. The project would be implemented by only one of the three divisions.


Required:
1. Compute the ROI for each division. (Do not round your intermediate calculations. Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.))

Division A ___??____%

Division B____???__%

Division C____???___%

2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign.)
Division A _____??

Division B ______???

Division C______???


3. Rank the divisions according to the ROI and residual income of each.
Division A

Division B

Division C


4-a. Compute the return on investment on the proposed expansion project. (Round your percentage answer to 2 decimal places, (i.e. 0.1234 should be entered as 12.34%.))
Return on investment of proposed expansion project ???%

4-b. Is this an acceptable project?

	No
	Yes

5. Without any additional calculations, state whether the proposed project would increase or decrease each division’s ROI.
Division A: increase or decrease
Division B: increase or decrease
Divsion C: increase or decrease
6. Compute the new ROI and residual income for each division if the project was implemented within that division. (Loss amounts should be entered with a minus sign. Enter your ROI percentage answers to 2 decimal places, (i.e., 0.1234 should be entered as 12.34%.))

Division A ??% Residual income? (Loss)

Division B ??% Residual income? (Loss)

Division C ??% Residual Income? (Loss)

Answer 1

1)

	Division A	Division B	Division C
Sales revenue	1,210,000	1,281,000	1,316,000
Cost of goods sold	748,000	941,000	956,000
Miscellaneous operating expenses	83,000	71,000	72,000
Interest and taxes	67,000	60,000	60,000
Net Income	312,000	209,000	228,000
Average invested assets	11,587,000	2,823,000	4,640,000
ROI	2.69%	7.40%	4.91%

2)

	Division A	Division B	Division C
Sales revenue	1,210,000	1,281,000	1,316,000
Cost of goods sold	748,000	941,000	956,000
Miscellaneous operating expenses	83,000	71,000	72,000
Interest and taxes	67,000	60,000	60,000
Net Income	312,000	209,000	228,000
Average invested assets	11,587,000	2,823,000	4,640,000
Target Income	926,960	225,840	371,200
Residual Income	-614,960	-16,840	-143,200

3)

	Rank
Division A	3
Division B	1
Division C	2

4a)ROI =653,000/7,200,000 = 9.07%

4b) Yes is this an acceptable project

5)

Division A	Increase
Division B	Increase
Division C	Increase

6)

	Division A	Division B	Division C
Sales revenue	1,210,000	1,281,000	1,316,000
Cost of goods sold	748,000	941,000	956,000
Miscellaneous operating expenses	83,000	71,000	72,000
Interest and taxes	67,000	60,000	60,000
Net Income	312,000	209,000	228,000
Income from new project	653,000	653,000	653,000
Total Income	965,000	862,000	881,000
Average invested assets	18,787,000	10,023,000	11,840,000
Target Income	1,502,960	801,840	947,200
Residual Income	-537,960	60,160	-66,200
ROI	5.14%	8.60%	7.44%