Question

Rundle Technologies, Inc. has three divisions. Rundle 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	$	660,000			$	107,580
Copier		930,000				100,440
Fax		480,000				65,760
Total	$	2,070,000			$	273,780

Rundle headquarters has $132,000 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
Divisions	Additional Investments
Printer	13.5	%
Copier	12.5	%
Fax	11.5	%

Required

1. a-1. Calculate the ROI for each division. a-2. Which division manager is currently producing the highest ROI?

2. b. Based on ROI, which division manager would be most eager to accept the $132,000 of investment funds?

3. c. Based on ROI, which division manager would be least likely to accept the $132,000 of investment funds?

4. d. Which division offers the best investment opportunity for Rundle?

5. g. Calculate the residual income:

1. (1) At the corporate (headquarters) level before the additional investment.

2. (2) At the division level before the additional investment.

3. (3) At the investment level.

4. (4) At the division level after the additional investment.

Requirement A1:

	ROI Printer Division % Copier Division % Fax Division %

A2-D

	a-2. Which division manager is currently producing the highest ROI? b. Based on ROI, which division manager would be most eager to accept the $132,000 of investment funds? c. Based on ROI, which division manager would be least likely to accept the $132,000 of investment funds? d. Which division offers the best investment opportunity for Rundle?

G1:

Residual Income:

G2-G4:

	Residual Income (loss) (2) Printer division    Copier division Fax division (3) Printer division Copier division Fax division (4) Printer division Copier division Fax division

Answer 1

Answer a-1

	Particulars	Printer	Copier	Fax
A	Operating Income	$ 107,580	$ 100,440	$   65,760
B	Operating assets	$ 660,000	$ 930,000	$ 480,000
A/B	ROI	16.30%	10.80%	13.70%

Answer a-2

Printer division

Answer b

Copier division

Because the expected ROI is more than the current RIO.

Answer c

Printer division

Because current ROI is much more than the expected ROI.

Answer d

Printer division

Because for the company, it will increase the overall ROI.

Answer g

Residual income (RI) = Operating income - (Operating assets x Desired ROI)

Part 1

RI for RTI = $273,780 - ($2,070,000 x .12) = $25,380

Part 2

RI for Printer Division = $107,580 - ($660,000 x .12) = $28,380

RI for Copier Division = $100,440 - ($930,000 x .12) = -$11,160

RI for Fax Division = $65,760 - ($480,000 x .12) = $8,160

Working for operating income of investment

	Addl. Investment	Expected ROI	Operating Income
Printer	132000	13.50%	17820
Copier	132000	12.50%	16500
Fax	132000	11.50%	15180

Part 3

RI for investment Printer Division = $17,820 - ($132,000 x .12) = $1,980

RI for investment Copier Division = $16,500 - ($132,000 x .12) = -$660

RI for investment Fax Division = $15,180 - ($132,000 x .12) = -$660

Part 4

RI for Printer Division = ($107,580 + $17,820) – (($660,000 + 132,000) x .12) = $30,360

RI for Copier Division = ($100,440 + $16,500) – (($930,000 + 132,000) x .12) = -$10,500

RI for Fax Division = ($65,760 + $15,180) – (($480,000 + 132,000) x .12) = $7,500

In case of any doubt, please comment.