Question

Luke Company has three divisions: Peak, View, and Grand. The company has a hurdle rate of 6.51 percent. Selected operating data for the three divisions follow:  

		Peak		View		Grand
Sales revenue	$	338,000	$	236,000	$	309,000
Cost of goods sold		211,000		116,000		191,000
Miscellaneous operating expenses		41,000		38,000		38,000
Average invested assets		1,260,000		880,000		1,165,000
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%.)) (Find peak%,view% and grand % for ROI 2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign. Round your answers to nearest whole dollar.) (Find peak,view and grand.)

Answer 1

Requirement 1

Calculation of ROI
	Peak	View	Grand
Sales revenue	$   338,000.00	$ 236,000.00	$   309,000.00
Cost of goods sold	$   211,000.00	$ 116,000.00	$   191,000.00
Gross profit	$   127,000.00	$ 120,000.00	$   118,000.00
Miscellaneous operating expenses	$     41,000.00	$ 38,000.00	$     38,000.00
Operating Income (A)	$     86,000.00	$ 82,000.00	$     80,000.00
Average invested assets (B)	$1,260,000.00	$ 880,000.00	$1,165,000.00
ROI (A/B)	6.83%	9.32%	6.87%

                                                                                                                                           

Requirement 2

Calculation of residual income
	Peak	View	Grand
Average invested assets	$ 1,260,000.00	$ 880,000.00	$ 1,165,000.00
Minimum rate of return /Hurdle rate	6.51%	6.51%	6.51%
Minimum return	$       82,026.00	$    57,288.00	$       75,841.50
Actual Return	$        86,000.00	$    82,000.00	$       80,000.00
Residual Income	$          3,974.00	$    24,712.00	$          4,158.50

Residual income is income in excess of minimum return