Question

In: Accounting

Marlon Inc. has 2 divisions. Each division’s required rate of return is the same as the...

Marlon Inc. has 2 divisions. Each division’s required rate of return is the same as the firm’s which is 15 percent. Planned operating results for 2002 are as follows:

Division

Income

Invested Capital

Lagos

$50 million

$250 million

Enugu      

$22 million

$100 million

                             

Requirement A:

a) Compute the ROI of both divisions and compare their performances based on ROI. Which division is performing better based on ROI?

b) Compute the Residual Income (RI) of both divisions and compare their       performances based on RI. Which division is performing better based on RI?

Requirement B:

c) Compute the ROI and RI of a new project under consideration by both divisions which would require $50 million in invested capital and would net $9 million in income.

d) Assume both divisions’ managers’ bonuses are tied to their individual division’s ROI. Would the manager of Lagos division accept or reject the project? Would the manager of Enugu division accept or reject the project?. Explain.

e) Repeat (d) but assume that both divisions’ managers’ bonuses are tied to their individual RI.

f) State whether top management wants the project to be accepted or rejected. Explain.

Solutions

Expert Solution

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division’s management...
Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division’s management is compensated based on the division’s operating income. Division A currently purchases cellular equipment from outside markets and uses it to produce communication systems. Division B produces similar cellular equipment that it sells to outside customers—but not to division A at this time. Division A’s manager approaches division B’s manager with a proposal to buy the equipment from division B. If it produces the...
Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division’s management...
Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division’s management is compensated based on the division’s operating income. Division A currently purchases cellular equipment from outside markets and uses it to produce communication systems. Division B produces similar cellular equipment that it sells to outside customers—but not to division A at this time. Division A’s manager approaches division B’s manager with a proposal to buy the equipment from division B. If it produces the...
Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division’s management...
Phoenix Inc., a cellular communication company, has multiple business units, organized as divisions. Each division’s management is compensated based on the division’s operating income. Division A currently purchases cellular equipment from outside markets and uses it to produce communication systems. Division B produces similar cellular equipment that it sells to outside customers—but not to division A at this time. Division A’s manager approaches division B’s manager with a proposal to buy the equipment from division B. If it produces the...
Capital Investments has three divisions. Each division's required rate of return is 15%. Planned operating results...
Capital Investments has three divisions. Each division's required rate of return is 15%. Planned operating results for 2018 are as follows: Division Operating income Investment A $15,000,000 $100,000,000 B $25,000,000 $125,000,000 C $11,000,000 $ 50,000,000 The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its income by $4,500,000. Required: a.   Compute the current ROI for each division. b.   Compute the current residual income for each division. c.   Rank the divisions according...
Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their own division’s return on investment (ROI). Assume the following information relative to the two divisions:
  Alpha and Beta are divisions within the same company. The managers of both divisions are evaluated based on their own division’s return on investment (ROI). Assume the following information relative to the two divisions: Case1234Alpha Division:    Capacity in units82,000402,000152,000302,000Number of units now being sold to outside customers82,000402,000102,000302,000Selling price per unit to outside customers$ 34$ 94$ 85$ 54Variable costs per unit$ 22$ 69$ 50$ 30Fixed costs per unit (based on capacity)$ 6$ 15$ 20$ 9Beta Division:    Number of units needed annually7,00032,00022,000120,400Purchase...
Sunrise has two divisions: East and Midwest. Sunrise has a minimum required rate of return of...
Sunrise has two divisions: East and Midwest. Sunrise has a minimum required rate of return of 8%. In 2019, the East division has average operating assets of 50 million, net operating income of $5 million, and sales of $100,000 million. In 2019, the Midwest division has average operating assets of 20 million, net operating income of $2.5 million, and sales of $25,000 million. Please (1) use both ROI and the residual income model to evaluate these two divisions' managerial performance...
Sun has two divisions: East and Midwest. Sun has a minimum required rate of return of...
Sun has two divisions: East and Midwest. Sun has a minimum required rate of return of 8%. In 2019, the East division has average operating assets of 50 million, net operating income of $5 million, and sales of $100,000 million. In 2019, the Midwest division has average operating assets of 20 million, net operating income of $2.5 million, and sales of $25,000 million. Please (1) use both ROI and the residual income model to evaluate these two divisions’ managerial performance...
BETA AND REQUIRED RATE OF RETURN a. A stock has a required return of 9%; the...
BETA AND REQUIRED RATE OF RETURN a. A stock has a required return of 9%; the risk-free rate is 5%; and the market risk premium is 3%. What is the stock's beta? Round your answer to two decimal places. b. If the market risk premium increased to 10%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. If the stock's beta is equal to 1.0, then the change in...
Altoona Technologies, Inc. has three divisions. Altoona has a desired rate of return of 11.0 percent....
Altoona Technologies, Inc. has three divisions. Altoona has a desired rate of return of 11.0 percent. The operating assets and income for each division are as follows: Divisions Operating Assets Operating Income Printer $ 740,000 $ 115,440 Copier 1,010,000 101,000 Fax 560,000 72,800 Total $ 2,310,000 $ 289,240 Altoona headquarters has $140,000 of additional cash to invest in one of its divisions. The division managers have identified investment opportunities that are expected to yield the following ROIs: Expected ROIs for...
Franklin Technologies, Inc. has three divisions. Franklin has a desired rate of return of 12.0 percent....
Franklin Technologies, Inc. has three divisions. Franklin has a desired rate of return of 12.0 percent. The operating assets and income for each division are as follows:       Divisions Operating Assets Operating Income Printer $ 610,000 $ 102,480 Copier 880,000 99,440 Fax 430,000 61,060 Total $ 1,920,000 $ 262,980 Franklin headquarters has $127,000 of additional cash to invest in one of its divisions. The division managers have identified investment opportunities that are expected to yield the following ROIs: Expected ROIs...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT