Question

Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is available for each division:

	Fruit Division	Flower Division
Sales revenue	$780,000	$1,170,000
Cost of goods sold and operating expenses	585,000	877,500
Net operating income	$195,000	$292,500
Average invested assets	$1,950,000	$1,625,000

Orange has established a hurdle rate of 6 percent.   

Required:
1-a. Compute each division’s return on investment (ROI) and residual income for last year. (Enter your ROI 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)	%	%

1-b. Determine which manager seems to be performing better.(Choose one)

Flower Division

Fruit Division

2. Suppose Orange is investing in new technology that will increase each division’s operating income by $124,000. The total investment required is $1,700,000, which will be split evenly between the two divisions. Calculate the ROI and return on investment for each division after the investment is made. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

	Fruits Division	Flower Division
ROI	%	%
Residual Income (Loss)

3. Which manager will accept the investment

Fruits Division	Accept or Reject
Flower Division	Accept or Reject

Answer 1

Req 1-a
			Fruit	Flower
Net income			195000	292500
Divide: Average invested assets			1950000	1625000
ROI			10%	18%
(Net Income/Average assets)*100
Average Invsted assets			1950000	1625000
Net income			195000	292500
Target income			117000	97500
(Average invested assets*6%)
Residual Income			78000	195000
Req 1-b:
Flower division
Req 2
			Fruit	Flower
Net income			319000	416500
			(195000+124000)	(292500+124000)
Divide: Average invested assets			2800000	2475000
			(1950000+850000)	(1625000+850000)
ROI			11%	17%
(Net Income/Average assets)*100
Average Invsted assets			2800000	2475000
Net income			319000	416500
Target income			168000	148500
(Average invested assets*6%)
Residual Income			151000	268000
Fruit Division		Accept	(as residual inccome increases)
Flower division		Accept	(as residual income increases)