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:

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).)

Compute the residual income (loss) for each division. (Loss amounts should be indicated by a minus sign. Round your Required Rate of Return percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

Assume that each division is presented with an investment opportunity that would yield a 28% rate of return.

If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?

If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?

Selected sales and operating data for three divisions of different structural engineering firms are
given as follows:

Explanation / Answer

1) the return on investment (ROI) for each division=

Division A = 453600/1440000 = 31.5%

Division B = 1153600/5600000 = 20.60%

Division C = 365650 / 2060000 = 17.75%

2) the residual income (loss) for each division =

Division A = 453600-1440000 * 26% = $79200

Division B = 1153600-5600000 * 20.60% = $0

Division C = 365650- 2060000 * 23% = - $108150

3)

a. If performance is being measured by ROI, Division A is accepted because ROI is 31.50%

b. If performance is being measured by residual income, Division A is accepted because residual income is $79200. Division C should be rejected being negative residual income.

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