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 | $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 will increase each division’s operating income by $120,000.
The total investment required is $1,500,000, which will be split
evenly between the two divisions. Calculate the ROI and residual
income for each division after the investment is made. Enter ROI as
a percentage rounded to 2 decimal places.
Solutions
Expert Solution
1. Return on Investments = Net operating income / Average invested assets
| Particulars | Fruit division | Flower division |
|---|---|---|
| 1. Net income | $165,000 | $247,500 |
| 2. Average invested assets | $2,062,500 | $1,375,000 |
| Return on investment ( 1/2 ) | 8% | 18% |
Residual income = Average invested assets * hurdle rate
Last year, Fruit division residual income = $2,062,500 * 5%
= $ 103,125
Last year, Flower division residual income = $1,375,000 * 5%
= $68,750
2. Orange is investing in new technology which increase each division's operating income by $120,000
Net operating income of Fruit division = $165,000 + $120,000 = $285,000
Net operating income of Flower division = $247,500 + $120,000 = $367,500
Total investment required is $1,500,000 and is evenly split between 2 divisions with $750,000 each.
| Particulars | Fruit division | Flower division |
|---|---|---|
| 1. Net operating income | $285,000 | $367,500 |
| 2. Average invested assets | $2,062,500 | $1,375,000 |
| 3. Additional investment | $750,000 | $750,000 |
| 4. Total investment ( 2 + 3) | $2,812,500 | $2,125,000 |
| Return on investment (1/4) | 10.13% | 17.29% |
Residual income for fruit division = Total investment * hurdle rate = $2,812,500 * 13% = $365,625
Residual income for flower division = $2,125,000 * 13% = $276,250
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
$
1,560,000
$
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.,...
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
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operating income $ 315,000 $ 567,000 Average invested assets $
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Power Inc. has two divisions, Windsor and Ridge. Following is the income statement for the past...
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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...
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What has become of the various parts of the flowers during
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How many locules are there in the ovary you are examining?
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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:
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Division
Cleaning Products
Division
Sales
$34,600,000
$31,350,000
Operating income
2,762,000
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Operating assets, January 1
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7,530,000
6,250,000
Forchen, Inc., requires an 8 percent minimum rate of return.
Required:
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Appliances Division.
$
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$
3. What if the
minimum required rate of return...
Forchen, Inc., provided the following information for two of its divisions for last year: Small...
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provided the following information for two of its divisions for
last year:
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Division
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$34,690,000
$31,350,000
Operating income
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1,252,700
Operating assets, January 1
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5,670,000
Operating assets, December 31
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Forchen, Inc.,
requires an 7 percent minimum rate of return.
Required:
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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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