Selected sales and operating data for three divisions of different structural en

Question

Selected sales and operating data for three divisions of different structural engineening ms are given as follows Average operating assets Net operating income $6,700,000 $10 700,000 0,800.000 $1.340,000 $ 5.350,000 $1.000,000 S 388,600 1,048 600298,900 Minimum required rate of return 22.00% 10.00% 1900% Required: 1. Compute the rebun on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Round your Turnover answers to 2 deaimal places. Round your Margin and RO percentage answers to 2 decimal places fie, 0.1234 should be entered as 12.34)) Division A Division B Division C 1525;% 2 Compute the residual inoome (loss) for each division (Loss amounts should be indicated by a minus sigr. Round your Regured Rate of Return percentage answers to 2 decind places? should be entered as 12.34)) 01224 Average operating assets Required rate of seturn Required operating inoome Actual operating income Required operating income (abovel Residual income(os 3. Assume that each division is presented wth an investment the opportunty? Division A Division B Division C b performance s being measured by residual inoome. wch division or divisions will Dvision B

Explanation / Answer

1) Margin = Net Operating Income/Sales (in %)

Turnover = Sales/Average Operating Assets

Return on Investment (ROI) = Margin*Turnover

Calculation of ROI

2) Residual Income (Amounts in $)

3) a)

b)

Division Margin (%) (A) Turnover (B) ROI (%) (A*B) Division A ($388,600/$6,700,000) = 5.8% ($6,700,000/$1,340,000) = 5 29.00 Division B ($1,048,600/$10,700,000) = 9.8% ($10,700,000/$5,350,000) = 2 19.60 Division C ($298,900/$9,800,000) = 3.05% ($9,800,000/$1,960,000) = 5 15.25

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