Question

Sunrise has two divisions: East and Midwest. Sunrise has a minimum required rate of return of 8%. In 2019, the East division has average operating assets of 50 million, net operating income of $5 million, and sales of $100,000 million. In 2019, the Midwest division has average operating assets of 20 million, net operating income of $2.5 million, and sales of $25,000 million. Please (1) use both ROI and the residual income model to evaluate these two divisions' managerial performance and provide comment on which manager performed better; (2) use margin and turnover ratios to compare two divisions' operating strategies.

Answer 1

(1) Residual Income of East Division and Midwest Division

The amount of residual income cannot indicate that whether the division is managed better or not.

East Division's greater amount of residual income cannot be used to say that it is better managed, as higher residual income is the results of more amount invested in Average Operating Asset.

On the other hand, it can be said that Midwest Division is better managed as it has higher Return on Investment (ROI) of 12.50% as compared to East Division's 10%

(2)

From the above calculation, it can be concluded that the operating strategies of Midwest Division is better than East Division as it has higher Return on Investment (ROI)