Luke Company has three divisions: Peak, View, and Grand. The company has a hurdl

Question

Luke Company has three divisions: Peak, View, and Grand. The company has a hurdle rate of 6.76 percent. Selected operating data for the three divisions follow Peak View Grand Sales revenue Cost of goods sold Miscellaneous operating expenses Average invested assets $330,000 228,000 301,000 186,000 32,000 920,000 1,055,000 212,000 45.000 117,000 34,000 1,230,000 Required: 1. Compute the return on investment for each division. (Enter your ROl answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.)) Peak View Grand Return on Investment 2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign. Round your answers to nearest whole dollar.) Peak View Grand Residual Income (Loss)

Explanation / Answer

Return on Investment = (Sales Revenue - COGS - Misc Operating Expenses)/Average Invested Assets

Peak = (330000-(212000+45000)) / 1230000 = 5.93%

View = (228000-(117000+34000)) / 920000 = 8.37%

Grand = (301000-(186000+32000)) / 1055000 = 7.87%

Residual Income = Operating Income - (Average invested assets X Hurdle Rate)

Peak = 73000 - (1230000 X 6.76%) = -10148

View = 77000 - (920000 X 6.76%) = 14808

Grand = 83000 - (1055000 X 6.76%) = 11682

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