Question

In: Accounting

Rooney Company has operating assets of $19,100,000. The company’s operating income for the most recent accounting...

Rooney Company has operating assets of $19,100,000. The company’s operating income for the most recent accounting period was $2,710,000. The Dannica Division of Rooney controls $7,940,000 of the company’s assets and earned $1,250,000 of its operating income. Rooney’s desired ROI is 8 percent. Rooney has $1,130,000 of additional funds to invest. The manager of the Dannica division believes that his division could earn $146,000 on the additional funds. The highest investment opportunity to any of the company’s other divisions is 9 percent.

Required

  1. Calculate the ROI of Dannica Division.

  1. (1) Before investment opportunity.

  2. (2) Only on the new investment opportunity.

  3. (3) Dannica total ROI if investment opportunity is accepted.

  1. Calculate the Dannica Division residual income from the new investment opportunity. If residual income is used as the sole performance measure, would the manager of the Dannica Division be likely to accept or reject the additional funding?

Solutions

Expert Solution

ANSWER

ROI of Dannica Division:

1. Before the investment opportunity:

ROI = Operating Income / Operating Assets = $ 1,250,000 / $ 7,940,000 = 0.15743 or 15.74 %.

2. Only on the new investment opportunity :

ROI = $ 146,000 / $ 1,130,000 = 0.12920 or 12.92%

3. If investment opportunity is accepted:

Total ROI = $ ( 1,250,000 + 146,000 ) / $ ( 7,940,000 + 1,130,000 ) = $ 1,396,000/ $ 9,070,000= 15.39%

Please note that the ROI of the Dannica Division has decreased from 15.74 % to 15.39%. Therefore, the manager of the Dannica Division might not be keen to take on the additional investment.

Residual Income of the new investment opportunity = Operating Income - ( Operating Assets x Minimum Required Rate of Return ) = $ 146,000 - ( $ 1,130,000 x 9%) = $ 44,300.

As the residual income from the new investment opportunity is greater than zero, it would add value to the Dannica Division. Therefore, the manager of the Dannica Division would be likely to accept the additional investment.

_____________________________________________

If you have any query or any Explanation please ask me in the comment box, i am here to helps you.please give me positive rating.

*****************THANK YOU**************

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Zachary Company has operating assets of $20,300,000. The company’s operating income for the most recent accounting...
Zachary Company has operating assets of $20,300,000. The company’s operating income for the most recent accounting period was $2,610,000. The Dannica Division of Zachary controls $8,210,000 of the company’s assets and earned $1,190,000 of its operating income. Zachary’s desired ROI is 8 percent. Zachary has $1,070,000 of additional funds to invest. The manager of the Dannica division believes that his division could earn $141,000 on the additional funds. The highest investment opportunity to any of the company’s other divisions is...
Thornton Company has operating assets of $19,500,000. The company’s operating income for the most recent accounting...
Thornton Company has operating assets of $19,500,000. The company’s operating income for the most recent accounting period was $2,690,000. The Dannica Division of Thornton controls $7,650,000 of the company’s assets and earned $1,220,000 of its operating income. Thornton’s desired ROI is 9 percent. Thornton has $1,100,000 of additional funds to invest. The manager of the Dannica division believes that his division could earn $141,000 on the additional funds. The highest investment opportunity to any of the company’s other divisions is...
Gibson Company has operating assets of $21,000,000. The company’s operating income for the most recent accounting...
Gibson Company has operating assets of $21,000,000. The company’s operating income for the most recent accounting period was $2,730,000. The Dannica Division of Gibson controls $6,830,000 of the company’s assets and earned $1,230,000 of its operating income. Gibson’s desired ROI is 11 percent. Gibson has $1,110,000 of additional funds to invest. The manager of the Dannica division believes that his division could earn $142,000 on the additional funds. The highest investment opportunity to any of the company’s other divisions is...
Waterway Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s...
Waterway Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Waterway made the following presentation to Dunn’s board of directors and suggested the Percy Division be eliminated. “If the Percy Division is eliminated,” she said, “our total profits would increase by $26,900.” The Other Five Divisions Percy Division Total Sales $1,665,000 $100,600 $1,765,600 Cost of goods sold 978,700 77,000 1,055,700 Gross profit 686,300 23,600 709,900 Operating expenses 527,200 50,500 577,700 Net income...
Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s...
Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Veronica made the following presentation to Dunn’s board of directors and suggested the Percy Division be eliminated. “If the Percy Division is eliminated,” she said, “our total profits would increase by $25,700.” The Other Five Divisions Percy Division Total Sales $1,663,000 $100,400 $1,763,400 Cost of goods sold 977,000 76,200 1,053,200 Gross profit 686,000 24,200 710,200 Operating expenses 528,400 49,900 578,300 Net income...
Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s...
Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Veronica made the following presentation to Dunn’s board of directors and suggested the Percy Division be eliminated. “If the Percy Division is eliminated,” she said, “our total profits would increase by $27,000.” The Other Five Divisions Percy Division Total Sales $1,663,000 $100,300 $1,763,300 Cost of goods sold 978,700 76,800 1,055,500 Gross profit 684,300 23,500 707,800 Operating expenses 527,700 50,500 578,200 Net income...
Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s...
Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Veronica made the following presentation to Dunn’s board of directors and suggested the Percy Division be eliminated. “If the Percy Division is eliminated,” she said, “our total profits would increase by $26,100.” The Other Five Divisions Percy Division Total Sales $1,665,000 $100,100 $1,765,100 Cost of goods sold 978,300 76,000 1,054,300 Gross profit 686,700 24,100 710,800 Operating expenses 526,800 50,200 577,000 Net income...
Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s...
Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Veronica made the following presentation to Dunn’s board of directors and suggested the Percy Division be eliminated. “If the Percy Division is eliminated,” she said, “our total profits would increase by $27,000.” The Other Five Divisions Percy Division Total Sales $1,665,000 $100,000 $1,765,000 Cost of goods sold 978,300 76,600 1,054,900 Gross profit 686,700 23,400 710,100 Operating expenses 528,100 50,400 578,500 Net income...
Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income...
Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:     Amount Percent of Sales   Sales $ 145,000 100%      Variable expenses 58,000 40%      Contribution margin 87,000 60%      Fixed expenses 15,000   Net operating income $ 72,000     Required: 1. Compute the company’s degree of operating leverage. (Round your answer to 2 decimal places.)       2. Using the degree of operating leverage, estimate the impact on net operating income of a...
Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income...
Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:    Amount Percent of Sales Sales $ 133,000 100% Variable expenses 53,200 40% Contribution margin 79,800 60% Fixed expenses 16,000 Net operating income $ 63,800 Construct a new contribution format income statement for the company assuming a 24% increase in sales. Engberg Company Contribution Income Statement Total Sales $ Variable expenses Contribution margin Fixed expenses Net operating income $
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT