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 $ 12,280,000 $ 35,350,000 $ 20,280,000 Average operating assets $ 3,070,000 $ 7,070,000 $ 5,070,000 Net operating income $ 601,720 $ 600,950 $ 567,840 Minimum required rate of return 10.00 % 10.50 % 11.20 % 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. 3. Assume that each division is presented with an investment opportunity that would yield a 11% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity? b. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?

Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

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

Compute the residual income (loss) for each division. (Do not round intermediate calculations. Loss amounts should be indicated by a minus sign.)

	Division A Division B Division C Residual income (loss)

Assume that each division is presented with an investment opportunity that would yield a 11% rate of return. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?

	Division A Division B Division C

Assume that each division is presented with an investment opportunity that would yield a 11% rate of return. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?

	Division A Division B Division C

Answer 1

Answer-

Answer-1)-Division A- Margin – (Net operating income /Sales)*100

= ($601720/$12280000)*100

= 4.9%

Turnover = Sales/ Average operating assets

= $12280000/$3070000

= 4

Return on investment = Margin*Turnover

= 4.9%*4

= 19.6%

Division B- Margin – (Net operating income /Sales)*100

= ($600950/$35350000)*100

= 1.7%

Turnover = Sales/ Average operating assets

= $35350000/$7070000

= 5

Return on investment = Margin*Turnover

= 1.7%*5

= 8.5%

Division C- Margin – (Net operating income /Sales)*100

= ($567840/$20280000)*100

= 2.8%

Turnover = Sales/ Average operating assets

= $20280000/$5070000

= 4

Return on investment = Margin*Turnover

= 2.8%*4

= 11.2%

2)- Residual income =Operating income –(Average operating assets*Required rate of return)

Division A= $601720-($3070000*11%)

= $601720-$337700

= $264020

Division B= $600950-($7070000*11%)

= $600950-$777700

= $(176750)

Division C= $567840-($5070000*11%)

= $567840-$557700

= 10140

3)- a)- If performance is being measured by ROI, division A, B & C will probably accept.

b)- If performance is being measured by residual income, division A & C will probably accept and division B reject the opportunity.