Question
In: Accounting
Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is...
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 | $ | 1,560,000 | $ | 2,340,000 | |
| Cost of goods sold and operating expenses | 1,170,000 | 1,755,000 | |||
| Net operating income | $ | 390,000 | $ | 585,000 | |
| Average invested assets | $ | 4,875,000 | $ | 2,437,500 | |
|
|
|||||
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 |
2. Suppose Orange is investing in new technology that will increase each division’s operating income by $125,000. The total investment required is $2,000,000, which will be split evenly between the two divisions. Calculate the ROI and return on investment for each division after the investment is made. (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) | ||||
3. Which manager will accept the investment.
|
Solutions
Expert Solution
Soluton 1a:
It is assumed that minimum required return on average investment is 10% for the company.
| Return on investment | |||||
| Particulars | Choose Numerator | / | Choose denomerator | = | Return on Investment |
| Formula | Income | / | Average Invested Assets | = | Return on Investment |
| Fruit Division | $390,000.00 | / | $4,875,000.00 | = | 8.00% |
| Flower Division | $585,000.00 | / | $2,437,500.00 | = | 24.00% |
| Compuatation of Residual Income | ||
| Investment Center | Fruit Division | Flower division |
| Net Income | $390,000.00 | $585,000.00 |
| Minimum required return | $487,500.00 | $243,750.00 |
| Residual Income | -$97,500.00 | $341,250.00 |
Solution 1b:
Flower division manager seems to be performing better.
Solution 2:
| Return on investment | |||||
| Particulars | Choose Numerator | / | Choose denomerator | = | Return on Investment |
| Formula | Income | / | Average Invested Assets | = | Return on Investment |
| Fruit Division | $515,000.00 | / | $5,875,000.00 | = | 8.77% |
| Flower Division | $710,000.00 | / | $3,437,500.00 | = | 20.65% |
| Compuatation of Residual Income | ||
| Investment Center | Fruit Division | Flower division |
| Net Income | $515,000.00 | $710,000.00 |
| Minimum required return | $587,500.00 | $343,750.00 |
| Residual Income | -$72,500.00 | $366,250.00 |
Solution 3:
If divisional managers performance are evaluated on the basis of residual income, then both manager will accept the new investment as it is resulting in increase of residual income.
If divisional managers performance are evaluated on the basis of ROI, then Flower division manager will not accept the new investment as his division ROI will decrease from 24% to 20.65%. Further Fruit division manager will accept the new investment as his division ROI will increase from 8% to 8.77%
ekkarill92 answered 1 year agoRelated Solutions
Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is...
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
$780,000
$1,170,000
Cost of goods
sold and operating expenses
585,000
877,500
Net operating income
$195,000
$292,500
Average
invested assets
$1,950,000
$1,625,000
Orange
has established a hurdle rate of 6
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...
Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is...
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...
Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is...
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
$
1,440,000
$
2,160,000
Cost of goods sold and operating
expenses
1,080,000
1,620,000
Net operating income
$
360,000
$
540,000
Average invested assets
$
3,000,000
$
2,160,000
Orange has established a hurdle rate of 8
percent.
Required:
1-a. Compute each division’s return on investment
(ROI) and residual income for last year. (Enter your...
Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is...
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
$
1,740,000
$
2,610,000
Cost of goods sold and operating
expenses
1,392,000
1,957,500
Net operating income
$
348,000
$
652,500
Average invested assets
$
3,480,000
$
2,718,750
Orange has established a hurdle rate of 6
percent.
Required:
1-a. Compute each division’s return on investment
(ROI) and residual income for last year. (Enter your...
Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is...
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 $ 1,260,000 $ 1,890,000 Cost
of goods sold and operating expenses 945,000 1,323,000 Net
operating income $ 315,000 $ 567,000 Average invested assets $
6,300,000 $ 2,362,500 Orange has established a hurdle rate of 4
percent. Required: 1-a. Compute each division’s return on
investment (ROI) and residual income for last year. (Enter your ROI...
Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is...
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. Compute each division’s return on investment
(ROI) and residual income for last year.
2. Suppose Orange is investing in new technology
that...
Power Inc. has two divisions, Windsor and Ridge. Following is the income statement for the past...
Power Inc. has two divisions, Windsor and Ridge. Following is
the income statement for the past month:
Windsor
Ridge
Total
Sales
$
360,000
$
320,000
$
680,000
Variable Costs
280,000
150,000
$
430,000
Contribution Margin
$
80,000
$
170,000
$
250,000
Fixed Costs (allocated)
122,000
128,000
$
250,000
Profit Margin
$
(42,000
)
$
42,000
$
0
What would the impact on operating income be if Power Inc.
discontinued the Windsor Division and could save $24,000 in
allocated fixed costs?
The Bean (Phaseolus vulgaris) Flower and Fruit: What has become of the various parts of the...
The Bean (Phaseolus vulgaris) Flower and
Fruit:
What has become of the various parts of the flowers during
development of the fruit?
How many locules are there in the ovary you are examining?
What has become of the various floral parts during development
of the fruit?
Forchen, Inc., provided the following information for two of its divisions for last year: Small...
Forchen, Inc., provided the following information for two of its
divisions for last year:
Small Appliances
Division
Cleaning Products
Division
Sales
$34,600,000
$31,350,000
Operating income
2,762,000
1,252,200
Operating assets, January 1
6,396,000
5,700,000
Operating assets, December 31
7,530,000
6,250,000
Forchen, Inc., requires an 8 percent minimum rate of return.
Required:
1. Calculate residual income for the Small
Appliances Division.
$
2. Calculate residual income for the Cleaning
Products Division.
$
3. What if the
minimum required rate of return...
Forchen, Inc., provided the following information for two of its divisions for last year: Small...
Forchen, Inc.,
provided the following information for two of its divisions for
last year:
Small Appliances
Division
Cleaning Products
Division
Sales
$34,690,000
$31,350,000
Operating income
2,365,700
1,252,700
Operating assets, January 1
6,397,000
5,670,000
Operating assets, December 31
7,550,000
6,590,000
Forchen, Inc.,
requires an 7 percent minimum rate of return.
Required:
1.
Calculate residual income for the Small Appliances Division.
$ _____
2.
Calculate residual income for the Cleaning Products Division.
$ _____
3.
What if the minimum required rate...
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