The following information is available about the status and operations of the Ma
ID: 2478376 • Letter: T
Question
The following information is available about the status and operations of the Manufacturing Division of Taylor Company, which has a hurdle rate of 5%. Divisional identifiable average assets $ 410,000 Divisional income from operations $ 17,924 Divisional sales revenue $ 371,171
a. Compute the ROI for the Manufacturing Division. (Round your answer to 1 decimal place.)
b. Break the Manufacturing Division ROI down using the DuPont formula. (Round your answers to 2 decimal places.)
c. Compute the residual income for the Manufacturing Division. (Round your answer to the nearest dollar amount.)
Explanation / Answer
1
Calculation of ROI for the Manufacturing Division:
Formula :
ROI = Divisional income from operations / Equity
= $ 17,924 / $ 410,000 =
4.37%
(Assuming Total Assets = Total Equity)
2
Calculation of Manufacturing Division ROI using the DuPont formula:
DuPont formula:
ROI = Profit Margin * Total Assets Turnover * Financial Leverage
Profit Margin = Divisional income from operations / Divisional sales revenue
= $ 17,924 / $ 371,171 =
4.83%
Total Assets Turnover = Divisional sales revenue / Divisional identifiable average assets
= $ 371,171 / $ 410,000 =
0.91
Financial Leverage = Total Assets / Total Equity =
1
ROI = 4.85%*0.91*1 =
4.37%
3
Calculation of residual income for the Manufacturing Division:
Divisional identifiable average assets
$410,000
Hurdle rate
5%
Normal Profits = 410000*5% =
$20,500
Divisional income from operations
$17,924
Residual income for the Manufacturing Division = 17924 - 20500 =
($2,576)
1
Calculation of ROI for the Manufacturing Division:
Formula :
ROI = Divisional income from operations / Equity
= $ 17,924 / $ 410,000 =
4.37%
(Assuming Total Assets = Total Equity)
2
Calculation of Manufacturing Division ROI using the DuPont formula:
DuPont formula:
ROI = Profit Margin * Total Assets Turnover * Financial Leverage
Profit Margin = Divisional income from operations / Divisional sales revenue
= $ 17,924 / $ 371,171 =
4.83%
Total Assets Turnover = Divisional sales revenue / Divisional identifiable average assets
= $ 371,171 / $ 410,000 =
0.91
Financial Leverage = Total Assets / Total Equity =
1
ROI = 4.85%*0.91*1 =
4.37%
3
Calculation of residual income for the Manufacturing Division:
Divisional identifiable average assets
$410,000
Hurdle rate
5%
Normal Profits = 410000*5% =
$20,500
Divisional income from operations
$17,924
Residual income for the Manufacturing Division = 17924 - 20500 =
($2,576)
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