Question

Luke Company has three divisions: Peak, View, and Grand. The company has a hurdle rate of 6.01 percent. Selected operating data for the three divisions follow:

		Peak		View		Grand
Sales revenue	$	331,000	$	231,000	$	305,000
Cost of goods sold		215,000		111,000		186,000
Miscellaneous operating expenses		37,000		34,000		32,000
Average invested assets		1,270,000		960,000		1,145,000

Required:
1. Compute the return on investment for each division.
2. Compute the residual income for each division.

Required 1

Compute the return on investment for each division. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))
Return on Investment

Peak %

View %

Grand %

Required 2

Compute the residual income for each division. (Loss amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to nearest whole dollar.)
Residual Income (Loss)
Peak =
View =
Grand =

Answer 1

	Peak	View	Grand
Sales revenue(A)	331,000	231,000	305,000
Cost of goods sold (B)	215,000	111,000	186,000
Miscellaneous operating expenses(C)	37,000	34,000	32,000
Net operating income (A-B-C)	79,000	86,000	87,000

1.

	Peak	View	Grand
Net operating income	79,000	86,000	87,000
Average invested assets	1,270,000	960,000	1,145,000
Return on investment ( Net operating income/ Average invested assets)	6.22%	8.96%	7.60%

Return on Investment

Peak 6.22%

View 8.96%

Grand 7.60%

2.

Residual income for peak = Net operating income - ( Average invested asset x Hurdle rate)

= 79,000-(1,270,000 x 6.01%)

= 79,000-76,327

= $2,673

Residual income for View = Net operating income - ( Average invested asset x Hurdle rate)

= 86,000- (960,000 x 6.01%)

= 86,000-57,696

= $28,304

Residual income for Grand = Net operating income - ( Average invested asset x Hurdle rate)

= 87,000-(1,145,000 x 6.01%)

= 87,000-68,815

= 18,186

Residual Income (Loss)
Peak = $2,673
View = $28,304
Grand =$18,186