Question

Munoz Corporation operates three investment centers. The following financial statements apply to the investment center named Bowman Division. BOWMAN DIVISION Income Statement For the Year Ended December 31, 2018 Sales revenue $ 105,780 Cost of goods sold 59,575 Gross margin 46,205 Operating expenses Selling expenses (2,820 ) Depreciation expense (4,035 ) Operating income 39,350 Nonoperating item Loss of sale of land (3,400 ) Net income $ 35,950 BOWMAN DIVISION Balance Sheet As of December 31, 2018 Assets Cash $ 12,502 Accounts receivable 40,276 Merchandise inventory 36,100 Equipment less accumulated depreciation 90,448 Nonoperating assets 9,400 Total assets $ 188,726 Liabilities Accounts payable $ 9,457 Notes payable 72,000 Stockholders’ equity Common stock 73,000 Retained earnings 34,269 Total liabilities and stockholder's equity $ 188,726 Required Calculate the ROI for Bowman. Munoz has a desired ROI of 14 percent. Headquarters has $90,000 of funds to assign to its investment centers. The manager of the Bowman Division has an opportunity to invest the funds at an ROI of 16 percent. The other two divisions have investment opportunities that yield only 15 percent. Calculate the new ROI for Bowman division, if the investment opportunity is adopted by Bowman. Based on the original data, calculate the original residual income. Also, calculate the new residual income based on information provided in Requirement d.

Answer 1