value: 10.00 points Selected sales and operating data for three divisions of dif
ID: 2479785 • Letter: V
Question
value: 10.00 points Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B $7,300,000 $11,300,000 $10,400,000 $1,460,000 $ 5,650,000 2,080,000 $467,200 $1,175,200 $ 379,600 Division C Sales Average operating assets Net operating income inimum required rate of return 27.00% 20.80% 24.00% 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 CExplanation / Answer
ROI computations:
ROI = Margin x Turnover
=Net operating income/Sales x Sales / Average operating assets
Division A:
ROI =$467,000/$ 7,300,000x $ 7,300,000 / $1,460,000
= 0.064x 5
=32%
Division B:ROI =$1,175,200/$ 11,300,000 x $ 11,300,000 / $5,650,000
= 0.104 x 2
=20.8%
Division C:
ROI =$379,600/ $ 10,400,000 x $ 10,400,000 / $2,080,000
= 0.0365 x5 = 18.25%
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Margin
Turnover
ROI
Division A
6.4
5.00
32.00%
Division B
10.40
2.00
20.80%
Division C
3.65
5.00
18.25%
2.
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Division A
Division B
Division C
Average operating Assets
1,460,000
5,650,000
2,080,000
Required rate of return
27.00%
20.80%
24.00%
Required operating income
394,200
1,175,200
499,200
Actual operating income
467,200
1,175,000
379,600
Required operating income (above)
394,200
1,175,200
499,200
Residual income
73,000
(200)
(119,600)
3.
Division A
Division B
Division C
Return on investment (ROI)
32.00%
20.80%
18.25%
Therefore, if the division is presented with an investmentopportunity yielding 29%, it probably would
Reject
Accept
Accept
Minimum required return for computing residual income
27.00%
20.80%
24.00%
Therefore, if the division is presented with an investmentopportunity yielding 29%, it probably would
Accept
Accept
Accept
a.
Division A
reject
Division B
Accept
Division C
Accept
b.
Division A
Accept
Division B
Accept
Division C
Accept
If performance is being measured by ROI, both Division A and Division C probably would reject the 29% investment opportunity. These divisions' ROIs currently exceed 29%;
Margin
Turnover
ROI
Division A
6.4
5.00
32.00%
Division B
10.40
2.00
20.80%
Division C
3.65
5.00
18.25%
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