Question

Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is available for each division:

	Fruit Division			Flower Division
Sales revenue	$	660,000		$	990,000
Cost of goods sold and operating expenses		495,000			742,500
Net operating income	$	165,000		$	247,500
Average invested assets	$	2,062,500		$	1,375,000

   

Orange has established a hurdle rate of 5 percent.   

Required:
1-a. Compute each division’s return on investment (ROI) and residual income for last year.(Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

	Fruit Division Flower Division ROI % % Residual Income (Loss)

  

Answer 1

	CALCULATION OF THE RETURN OF INVESTMENT
	Return of Investment = Net Income / Average Investment
		Fruit Divission	Flower Divission
	Return of Investment =
	Net Operating Income =	$                 1,65,000	$                          2,47,500
	Divide By	"/" By	"/" By
	Avergae Investment	$               20,62,500	$                        13,75,000
	Return of Investment =	8.00%	18.00%
	Return of Investment =	8.00%	18.00%
	CALCULATION OF THE RESIDUAL INCOME
	Residual Income = Operating Income - ( % Cost of Capital X Average Operating Assets)
	Residual Income =
	Net Operating Income (A)	$                 1,65,000	$                          2,47,500
	Less:
	% of Cost of Capital or Hurdle Rate	5%	5%
	X By Average Operating assets	$               20,62,500	$                        13,75,000
	= (B)	$                 1,03,125	$                              68,750
	Residual Income (A -B) =	$                     61,875	$                          1,78,750
	Answer =	$                     61,875	$                          1,78,750