Question

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.

2. Compute the residual income (loss) for each division.

1
	Margin Turnover ROI Division A    % % Division B % % Division C    % %

2
	Division A Division B Division C Residual income (loss)

Answer 1

Margin
			A	B	C
Net Operating income	5,16,600	5,72,000	5,97,400
Divide: Sales revenue	1,26,00,000	3,57,50,000	2,06,00,000
Margin			4.10%	1.60%	2.90%
Turnover
			A	B	C
Sales revneue		1,26,00,000	3,57,50,000	2,06,00,000
Divide: Average Assets	31,50,000	71,50,000	51,50,000
Turnover			4	5	4
ROI:
			A	B	C
Margin			4.10%	1.60%	2.90%
Multiply: Turnover		4	5	4
ROI			16.40%	8%	11.60%
Residual Income
			A	B	C
Average assets		31,50,000	71,50,000	51,50,000
Multiply: target rate of return	9.00%	9.50%	11.60%
Target return		283500	679250	597400
Actual net income		516600	572000	597400
Residual income		233100	-107250	0
Req 1.
		Margin	turnover	Roi
A		4.10%	4	16.40%
B		1.60%	5	8%
C		2.90%	4	11.60%
Req 2.
		A	B	C
Residual income	2,33,100	-1,07,250	0