Selected sales and operating data for three divisions of different structural en

Question

Selected sales and operating data for three divisions of different structural engineering firms are given as follows Division A Division B $6,000,000 $10,000,000 $9,100,000 $1,200,000 2,500,000 $1,820,000 $306,000 $ 910,000 213,850 Division C Sales Average operating assets Net operating income inimum required rate of return 20.00% 36.40% 17.00% Required 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) Margin Turnover ROI Division A Division B Division C 5.10: %

Explanation / Answer

(1)

Margin

Turnover

ROI

Division A

(306000/6000000)

=5.10%

(6000000/1200000)

=5

25.5%

Division B

(910000/10000000)

=9.10%

(10000000/2500000)

=4

36.4%

Division C

(213850/9100000)

=2.35%

(9100000/1820000)

=5

11.75%

(2)

Division A

Division B

Division C

Average Operating Asset

1200000

2500000

1820000

Required Rate of Return

20%

36.40%

17%

Requred Operating income

240000

910000

309400

Actual Operating Income

306000

910000

213850

Required Operating income (above)

240000

910000

309400

Residual income (loss)

66000

0

-95550

(3) (a) If rate of return required 22%

Division A

Accept

Division B

Accept

Division C

Reject

(a) Basd on residual income

Division A

Accept

Division B

Accept/Reject

Division C

Reject

Margin

Turnover

ROI

Division A

(306000/6000000)

=5.10%

(6000000/1200000)

=5

25.5%

Division B

(910000/10000000)

=9.10%

(10000000/2500000)

=4

36.4%

Division C

(213850/9100000)

=2.35%

(9100000/1820000)

=5

11.75%

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