Question

In: Accounting

Assume division 1 of the XYZ Company had the following results as of 12/31/2020: Management’s hurdle...

Assume division 1 of the XYZ Company had the following results as of 12/31/2020: Management’s hurdle rate is 8%

Sales (CR)

$5,000,000

Operating Income (CI)

1,000,000

Total assets (CA)

10,000,000

               

21.  What is the division’s Return on Investment (ROI)?

  1. 5%
  2. 10%
  3. 20%
  4. 50%

22.  What is the division’s margin?

  1. 5%
  2. 10%
  3. 20%
  4. 50%

23.  What is the division’s turnover?

  1. 5%
  2. 10%
  3. 20%
  4. 50%

24.  What is the division’s Residual Income (RI)?

  1. $0
  2. $200,000
  3. $500,000
  4. $800,000

Solutions

Expert Solution

Given,

Sales(CR) = $50,00,000

Operating Income(CI) = $10,00,000

Total Asset (CA) = $100,00,000

Hurdle Rate =8%

Answer to Question 1:

Return on Investment = Operating Income/ Total Asset

= ($10,00,000/ $100,00,000)*100

=10%

Answer to Question 2:

(Revenue)Sales(CR) = $50,00,000

Operating Income(CI) = $10,00,000

Division Margin = Operating Income/ Revenues

= ($10,00,000/ $50,00,000)*100

= 20%

  

Answer to Question 3:

(Revenue)Sales(CR) = $50,00,000

Total Asset (CA) = $100,00,000

Division's Turnover = (Total Revenue/ Total Asset )*100

=($50,00,000/ $100,00,000) *100

= 50%

Answer to Question 4:

Residual Income is the difference between the actual income and the required return on investment.

Actual Operating Income = $10,00,000

Total Asset (CA) = $100,00,000

Return on Investment = 10%

Required Return on Investment= Total Asset *  Return on Investment

= $100,00,000 * 10%

= $10,00,000

Residual Income = Actual Operating Income - Required Return on Investment

= $10,00,000 - $10,00,000

= $0


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