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

Question

Selected sales and operating data for three divisions of different structural engineering firms are
given as follows:

Division B $5,900,000 $9,900,000 $9,000,000 $1,180,000 $4,950,000 $1,800,000 $ 295,000 891,000 202,500 DivisionA DivisionC Sales Average operating assets Net operating income Minimum required rate of return 19.00% 18.00% 16.00% 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 (ie, 0.1234 should be entered as 12.34).) Margin ROI Turnover Division A Division B Division C 0 0 0 2. Compute the residual income (loss) for each division. (Loss amounts should be indicated by a minus sign. Round your Required Rate of Return percentage answers to 2 decimal places (ie, 0.1234 should be entered as 12.34).) Division A Division B Division C Average operating assets Required rate of return Required operating income Actual operating income Required operating income (above) Residual income (loss) 0 0 0

Explanation / Answer

Ans.1 Margin Turnover ROI Division A 5% 5 25% Division B 9% 2 18% Division C 2.25% 5 11.25% Margin =   Net operating income / Sales * 100 Division A 295000 / 5900000 * 100 5% Division B 891000 / 9900000 * 100 9% Division C 202500 / 9000000 * 100 2.25% Turnover = Sales / Average operating assets Division A 5900000 / 1180000 5 Division B 9900000 / 4950000 2 Division C 9000000 / 1800000 5 ROI = Margin * Turnover Ans.2 Division A Division B Division C Average operating assets 1180000 4950000 1800000 Required rate of return 19% 18% 16% Required operating income 224200 891000 288000 Actual operating income 295000 891000 202500 Required operating income 224200 891000 288000 Residual income/loss 70800 0 -85500 *Required operating income = Average operating assets * Required rate of return. *Residual income/ loss = Actual operating income - Required operating income. Ans.3 Division A Reject Division B Accept Division C Accept *The investment opportunity should be accepted by Division B & C as these division's ROI is less than the opportunity. Ans.4 Division A Accept Division B Accept Division C Accept *Division A, B & C should accept the opportunity because all of these have the lower minimum required rate of return than the opportunity.

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