Question

Luke Company has three divisions: Peak, View, and Grand. The company has a hurdle rate of 6.76 percent. Selected operating data for the three divisions follow:

		Peak		View		Grand
Sales revenue	$	343,000	$	228,000	$	301,000
Cost of goods sold		204,000		105,000		201,000
Miscellaneous operating expenses		41,000		39,000		34,000
Average invested assets		1,360,000		910,000		1,165,000

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

Return on Investment

Peak (%) =

View (%) =

Grand (%) =

Residual Income (Loss)

Peak =

View =

Grand =

Answer 1

PART 1: RETURN ON INVESTMENT

Return on Investment = Net operating profit / average invested assets * 100

Step 1: Net Operating Profit

Particulars	Peak	View	Grand
Sales revenue	$343,000	$228,000	$301,000
Less: Cost of goods sold	($204,000)	($105,000)	($201,000)
Miscellaneous operating Expenses	($41,000)	($39,000)	($34,000)
Net Profit	$98,000	$84,000	$66,000

Step 2: Return on Investment

(a) Peak

Return on investment = $98,000 / $1,360,000 * 100 = 7.21%

(b) View

Return on investment = $84,000 / $910,000 * 100 = 9.23%

Grand

Return on investment = $66,000 / $1,165,000 * 100 = 5.67%

PART 2: RESIDUAL INCOME

Residual Income = Net operating income - (Minimum required rate of return * average invested assets)

Peak

Residual Income = $98,000 - (6.76% * $1,360,000)

Residual Income = $98,000 - $91936 = $6064

View

Residual Income = $84,000 - (6.76% * $910,000)

Residual Income = $84,000 - $61,516 = $22,484

Grand

Residual Income = $66,000 - (6.76% * $1,165,000)

Residual Income = $66,000 - $78,754 = ($12,754)

All the best...