Question
In: Accounting
Selected sales and operating data for three divisions of different structural engineering firms are given as...
Selected sales and operating data for three divisions of different structural engineering firms are given as follows:
| Division A | Division B | Division C | |||||||
| Sales | $ | 6,900,000 | $ | 10,900,000 | $ | 10,000,000 | |||
| Average operating assets | $ | 1,725,000 | $ | 5,450,000 | $ | 2,500,000 | |||
| Net operating income | $ | 414,000 | $ | 1,090,000 | $ | 325,000 | |||
| Minimum required rate of return | 19.00 | % | 20.00 | % | 16.00 | % | |||
Required:
1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Round your answers to 2 decimal places.)
2. Compute the residual income (loss) for each division. (Loss amounts should be indicated by a minus sign. Round your "Required rate of return" to 2 decimal places.)
3. Assume that each division is presented with an investment opportunity that would yield a 21% rate of return.
a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?
b. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?
Solutions
Expert Solution
Solution 1:
| Profit Margin | |||||||
| Particulars | Choose Numerator | / | Choose denomerator | = | Profit Margin | ||
| Details | Amount | Details | Amount | ||||
| Division A | Operating Income | $414,000.00 | Sales | $6,900,000.00 | 6.00% | ||
| Division B | Operating Income | $1,090,000.00 | Sales | $10,900,000.00 | 10.00% | ||
| Division C | Operating Income | $325,000.00 | Sales | $10,000,000.00 | 3.25% | ||
| Investment Turnover | |||||||
| Particulars | Choose Numerator | / | Choose denomerator | = | Investment Turnover | ||
| Details | Amount | Details | Amount | ||||
| Division A | Sales | $6,900,000.00 | Average operating assets | $1,725,000.00 | 4.00 | ||
| Division B | Sales | $10,900,000.00 | Average operating assets | $5,450,000.00 | 2.00 | ||
| Division C | Sales | $10,000,000.00 | Average operating assets | $2,500,000.00 | 4.00 | ||
| Return on Investment | |||||
| Particulars | Profit Margin | * | Investment Turnover | = | Return on Investment |
| Division A | 6.00% | 4.00 | 24.00% | ||
| Division B | 10.00% | 2.00 | 20.00% | ||
| Division C | 3.25% | 4.00 | 13.00% | ||
Solution 2:
| Computation of Residual Income | |||
| Division | Operating Income | Minimum Required Return | Residual Income |
| Division A | $414,000.00 | $327,750.00 | $86,250.00 |
| Division B | $1,090,000.00 | $1,090,000.00 | $0.00 |
| Division C | $325,000.00 | $400,000.00 | -$75,000.00 |
Solution 3a:
If performance is being measured by ROI then Division B and Division C will accept the opportunity as there current ROI is below level 21% and accepting investment opportunity will increase overall ROI for division B and division C.
Further Division A will not accept the investment opportunity as it will result in decrease in overall ROI for division A as its exisitng ROI is higher than 21%
Solution b:
If performance is being measured by residual income, then all division will accept the investment opportunity as return offered by investment opportunity is higher than minimum required return for all divisions. Thus it wil increase Residual income for all the divisions.
ekkarill92 answered 1 year agoRelated Solutions
Selected sales and operating data for three divisions of different structural engineering firms are given as...
Selected sales and operating data for three divisions of
different structural engineering firms are given as follows:
Division A
Division B
Division C
Sales
$
12,000,000
$
14,000,000
$
25,000,000
Average operating assets
$
3,000,000
$
7,000,000
$
5,000,000
Net operating income
$
600,000
$
560,000
$
800,000
Minimum required rate of return
14
%
10
%
16
%
Required:
1. Compute the return on investment (ROI) for each division
using the formula stated in terms of margin and turnover....
Selected sales and operating data for three divisions of different structural engineering firms are given as...
Selected sales and operating data for three divisions of
different structural engineering firms are given as follows:
Division A
Division B
Division C
Sales
$
12,600,000
$
35,750,000
$
20,600,000
Average operating assets
$
3,150,000
$
7,150,000
$
5,150,000
Net operating income
$
516,600
$
572,000
$
597,400
Minimum required rate of return
9.00
%
9.50
%
11.60
%
Required:
1. Compute the return on investment (ROI) for each division
using the formula stated in terms of margin and turnover....
Selected sales and operating data for three divisions of different structural engineering firms are given as...
Selected sales and operating data for three divisions of
different structural engineering firms are given as follows:
Division A
Division B
Division C
Sales
$
5,100,000
$
9,100,000
$
8,200,000
Average operating assets
$
1,020,000
$
2,275,000
$
1,640,000
Net operating income
$
214,200
$
746,200
$
118,900
Minimum required rate of return
17.00
%
32.80
%
14.00
%
Required:
1. Compute the return on investment (ROI) for each division
using the formula stated in terms of margin and turnover....
Selected sales and operating data for three divisions of different structural engineering firms are given as...
Selected sales and operating data for three divisions of
different structural engineering firms are given as follows:
Division A Division B Division C Sales $ 12,280,000 $ 35,350,000 $
20,280,000 Average operating assets $ 3,070,000 $ 7,070,000 $
5,070,000 Net operating income $ 601,720 $ 600,950 $ 567,840
Minimum required rate of return 10.00 % 10.50 % 11.20 % Required:
1. Compute the return on investment (ROI) for each division using
the formula stated in terms of margin and turnover....
Selected sales and operating data for three divisions of different structural engineering firms are given as...
Selected sales and operating data for three divisions of
different structural engineering firms are given as follows:
Division A
Division B
Division C
Sales
$
12,360,000
$
28,360,000
$
25,450,000
Average operating assets
$
3,090,000
$
7,090,000
$
5,090,000
Net operating income
$
494,400
$
453,760
$
636,250
Minimum required rate of return
7.00
%
7.50
%
12.50
%
Required:
1. Compute the return on investment (ROI) for each division
using the formula stated in terms of margin and turnover....
Selected sales and operating data for three divisions of different structural engineering firms are given as...
Selected sales and operating data for three divisions of
different structural engineering firms are given as follows:
Division A
Division B
Division C
Sales
$
12,120,000
$
28,120,000
$
20,120,000
Average
operating assets
$
3,030,000
$
7,030,000
$
5,030,000
Net operating
income
$
496,920
$
449,920
$
503,000
Minimum required
rate of return
7.00
%
7.50
%
10.00
%
Required:
1. Compute the return on investment (ROI) for each division
using the formula stated in terms of margin and turnover....
Selected sales and operating data for three divisions of different structural engineering firms are given as...
Selected sales and operating data for three divisions of
different structural engineering firms are given as follows:
Division A
Division B
Division C
Sales
$
16,000,000
$
36,000,000
$
20,800,000
Average operating assets
$
3,200,000
$
7,200,000
$
5,200,000
Net operating income
$
752,000
$
576,000
$
540,800
Minimum required rate of return
9.00
%
9.50
%
10.40
%
Required:
1. Compute the margin, turnover, and return on investment (ROI)
for each division.
2. Compute the residual income (loss) for...
Selected sales and operating data for three divisions of different structural engineering firms are given as...
Selected sales and operating data for three divisions of
different structural engineering firms are
given as follows:
Division A
Division B
Division C
Sales
$
5,600,000
$
9,600,000
$
8,700,000
Average operating assets
$
1,120,000
$
3,200,000
$
1,740,000
Net operating income
$
263,200
$
835,200
$
169,650
Minimum required rate of return
16.00
%
26.10
%
13.00
%
Required:
1.
Compute the return on investment (ROI) for each division using
the formula stated in terms of margin and turnover....
Selected sales and operating data for three divisions of different structural engineering firms are given as...
Selected sales and operating data for three divisions of
different structural engineering firms are given as follows:
Division
A
Division
B
Division C
Sales
$12,000,000
$14,000,000
$25,000,000
Average operating
assets
$3,000,000
$7,000,000
$5,000,000
Net operating
income
$600,000
$560,000
$800,000
Minimum required rate of
return
14%
10%
16%
Required:
1. Compute the
return on investment (ROI) for each division using the formula
stated in terms of margin and turnover.
ANSWER: Division A margin
=
__________
...
Selected sales and operating data for three divisions of different structural engineering firms are given as...
Selected sales and operating data for three divisions of
different structural engineering firms are given as follows:
Division A
Division B
Division C
Sales
$
12,440,000
$
35,550,000
$
25,550,000
Average operating assets
$
3,110,000
$
7,110,000
$
5,110,000
Net operating income
$
547,360
$
639,900
$
740,950
Minimum required rate of return
10.00
%
10.50
%
14.50
%
Compute the return on investment (ROI) for each division using
the formula stated in terms of margin and turnover. (Do not...
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