Bueller Ltd. of Australia has two divisions, one in Brisbane and one in Melbourn
ID: 2493252 • Letter: B
Question
Bueller Ltd. of Australia has two divisions, one in Brisbane and one in Melbourne. Selected data on the two divisions follow:
Brisbane
Melbourne
Sales
9,000,000
20,000,000
Operating Income
630,000
1,800,000
Average operating assets
3,000,000
10,000,000
Required:
1. Compute the return on investment (ROI) for each division.
2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 16%. Compute the residual income for each division.
3. Is the Melbourne Division’s greater residual income an indication that it is better managed? Explain
Brisbane
Melbourne
Sales
9,000,000
20,000,000
Operating Income
630,000
1,800,000
Average operating assets
3,000,000
10,000,000
Explanation / Answer
Answer 1. ROI = Net Operating Income / Average Operating Assets Brisbane Melbourne Net operating income 630,000 1,800,000 Avg. Operating Assets 3,000,000 10,000,000 ROI 21% 18% Answer 2. Residual Income = Net operating Income - (Avg. Operating Assest X Min. Req. rate of Return) Brisbane Melbourne Min. req. Rate of return 16% 16% Net Operating Income 630,000 1,800,000 Charge for Use of Capital 480,000 1,600,000 Residula Income 150,000 200,000 Answer 3. No, the Melbourne Division is simply larger than the Brisbane Division and for this reason alone one would expect that it would have a greater amount of residual income. In fact, based on the data above, the Melbourne Division does not appear to be as well managed as the Brisbane Division. The Melbourne Division has an 18% return on investment as compared to 21% for the Brisbane Division Residual income can not be used to compare the performance of divisions of different sizes. Larger divisions will almost always look better.
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