Question

Luke Company has three divisions: Peak, View, and Grand. The company has a hurdle rate of 5.26 percent. Selected operating data for the three divisions follow:  

		Peak		View		Grand
Sales revenue	$	337,000	$	226,000	$	307,000
Cost of goods sold		205,000		111,000		199,000
Miscellaneous operating expenses		40,000		32,000		36,000
Average invested assets		1,350,000		960,000		1,075,000
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%.)) 2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign. Round your answers to nearest whole dollar.)

Answer 1

Solution 1:

Computation of Return on Investment for each division
Particulars	Peak	View	Grand
Sales Revenue	$3,37,000.00	$2,26,000.00	$3,07,000.00
Less: Cost of Goods	$2,05,000.00	$1,11,000.00	$1,99,000.00
Less: Misc. Operating expenses	$40,000.00	$32,000.00	$36,000.00
Net Operating Income	$92,000.00	$83,000.00	$72,000.00
Average Invested Assets	$13,50,000.00	$9,60,000.00	$10,75,000.00
ROI (Net Operating Income/Average Invested Assets)	6.81%	8.65%	6.70%

Solution 2:

Computation of Residual Income
Particulars	Peak	View	Grand
Average Invested Assets	$13,50,000.00	$9,60,000.00	$10,75,000.00
Minimum required return	5.26%	5.26%	5.26%
Minimum net operating income	$71,010.00	$50,496.00	$56,545.00
Actual net operating income	$92,000.00	$83,000.00	$72,000.00
Residual Income (Actual Operating income - Minimum Operating Income)	$20,990.00	$32,504.00	$15,455.00