Question

Financial data for three different divisions of the same company, for last year, appear below: Division                                     A          %             B         %              C          % Company Total % Sales                                  $3,200,000            $3,500,000           $5,000,000 Variable Costs                    1,450,000              1,750,000             2,750,000 Traceable Fixed Costs        1,250,000              1,350,000             1,450,000 Segment Margin Common Fixed Costs:                                                                                              1,500,000 PART I: Complete the above table showing the Contribution Margin Ratio(CMR), and the segment margin for each of the segments. Determine the CMR for the company as a whole . If the company were to add a new division, what information from the above would you use to assist in the decision-making? Division                                     A                            B                          C             Company Total Average Operating Assets $4,000,000           $4,375,000         $4,000,000                [AOA]                                                                                                                Segment  Margin                                         Turnover [T/O] ROI Minimum Required Rate of Return - MRROR  for the industry                                      [MRROR] @ 8% Residual Income [RI] Required:    Complete the above comparison and answer the questions that follow

Here are the formulas for:

                 Margin - >  OI          Turnover - > Sales             ROI -> Margin x Turnover

                                    Sales                             AOA

RI -> OI – (MRROR x AOA)

1. Compute each division’s turnover and ROI for the reporting period. Explain what is meant by “turnover”
2. In the industry the average MRROR is 8%. Determine the residual income (RI) for each division. What is the sigfnificance of the MRROR? Why is RI a better measure of performance than ROI?
3. If sales in the industry increased by 10%, without any increase in operating assets, which company would show the highest largest change in operating income? Why?
4. If an expansion program that would require new investments of $1,000,000 in operating assets were undertaken, which division would you recommend in order to produce the highest return? Why?

Answer 1