Wescott Company has three divisions: A, B, and C. The company has a hurdle rate

Question

Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows Sales revenue Cost of goods sold Miscellaneous operating expenses Interest and taxes Average invested assets Division A Division B Division C $1,260,000 $ 939,000 $ 920,000 668,000 54,000 42,000 8,473.000 1977.000 3.254.000 779,000 65,000 49,000 689,000 53,000 42,000 Wescott is considering an expansion project in the upcoming year that will cost $5.1 million and return $455,000 per year. The project would be implemented by only one of the three divisions Required 1 Compute the ROI for each division. (Do not round your intermediate calculations. Round your percentages to 2 decimal places.) DivisionA DivisionB Division C ROI 4.33X % 7.84x % 4.79X % 2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign esidua income Division A $(310,840)X Division B$ Division C(104,320)X (3,160)X 3. Rank the divisions according to the ROl and residual income of each. Rank DivisionA DivisionB Division C 4-a. Compute the return on the proposed expansion project. (Round your percentages to 2 decimal places.) Return on Proposed Expansion Project 8.92

Explanation / Answer

(6)

Returns for each division = Sales - Cost of goods sold - Miscellaneous operating expenses - Interest & taxes

Division A ($): 1,260,000 - 779,000 - 65,000 - 49,000 = 367,000

Division B ($): 939,000 - 689,000 - 53,000 - 42,000 = 155,000

Division C ($): 920,000 - 668,000 - 54,000 - 42,000 = 156,000

With the proposed investment, Returns of each division will increase by $455,000. New returns:

Division A ($): (367,000 + 455,000) = 822,000

Division B ($): (155,000 + 455,000) = 610,000

Division C ($): (156,000 + 455,000) = 611,000

Also, Average assets of each division will increase by $5.1 million. New average assets:

Division A ($): (8,473,000 + 5,100,000) = 13,573,000

Division B ($): (1,977,000 + 5,100,000) = 7,077,000

Division C ($): (3,254,000 + 5,100,000) = 8,354,000

(a) ROI = Returns / Average assets

Division A: $822,000 / $13,573,000 = 0.0606, or 6.06%

Division B: $610,000 / $7,077,000 = 0.0862, or 8.62%

Division C: $611,000 / $8,354,000 = 0.0731, or 7.31%

(b) Residual income = Returns - (Average assets x Hurdle rate)

Division A ($): 822,000 - (13,573,000 x 0.08) = 822,000 - 1,085,840 = - 263,840

Division B ($): 610,000 - (7,077,000 x 0.08) = 610,000 - 566,160 = 43,840

Division A ($): 611,000 - (8,354,000 x 0.08) = 611,000 - 668,320 = - 57,320

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