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ID: 2491783 • Letter: S

Question

Safari File Edit View History Bookmarks Window Help # O A z 'O -LO, Tue 4:35 PM Lynette Disla a E ezto.mheducation.com Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division Sales Average operating assets Net operating income Minimum required rate of return Division B $5,800,000 $9,800,000 $8,900,000 $1,450,000 4,900,000 $2,225,000 $ 284,200 872,200 S 191,350 18.00% 17.80% 15.00% Required 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Round your answers to 2 decimal places.) Margin Turnover ROI Division A Division B Division C 2. Compute the residual income (loss) for each division. (Loss amounts should be indicated by a minus sign. Round your "Required rate of return" to 2 decimal places.) Division A Division B DivisionC Average operating assets Required rate of return Required operating inco me na Disla ...oc.docx DEC 8

Explanation / Answer

Margin = net operating income/ Sales

Turnover = Sales/ Average operating Assets

ROI= Average operating Assets x Turnover

1)

Division

Margin

Turnover

ROI

A

4.90%

4.00

19.60%

B

0.89%

2.00

1.78%

C

2.15%

4.00

8.60%

2)

Residual income = Net operating Income- Required operating Income

Division

A

B

C

Average Operating Assets

1450000

4900000

2225000

(x) required return

18%

18%

15%

Required operating income

261000

872200

333750

Actual operating income

284200

872200

191350

Residual income

23200

0

-142400

3)

Division

A

B

C

Average Operating Assets

1450000

4900000

2225000

(x) required return

20%

20%

20%

Required operating income

290000

980000

445000

Actual operating income

284200

872200

191350

Residual income

-5800

-107800

-253650

All divisions have negative residual income, so all the divisons will be rejected.

Division

Margin

Turnover

ROI

A

4.90%

4.00

19.60%

B

0.89%

2.00

1.78%

C

2.15%

4.00

8.60%