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 $5,500,000 9,500,000 $8,600,000 $1,100,000 4,750,000 $1,720,000 $ 253,000 817,000 159,100 Division A Division C Sales Average operating assets Net operating income Minimum required rate of return 15.00% 17.20% 12.00% 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 Rol percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) Margin Turnover ROl Division A DivisionB 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 percentage answers to 2 decimal places (i.e., 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)

Explanation / Answer

Req 1 Net Income Sales Av. Assets Margin Assets Turnover ROI Division A 253000.00 5500000.00 1100000.00 4.60% 5 23.00% Division B 817000.00 9500000.00 4750000.00 8.60% 2 17.20% Division C 159100.00 8600000.00 1720000.00 1.85% 5 9.25% Note: margin: Net income/Sales *100 Turnover: sales/ Average assets ROI: Margin * Assets turnover Req 2: Div-A Div-B Div-C Average operating assets 1100000.00 4750000.00 1720000.00 Required rate of return 15% 17.20% 12.00% Required operating income 165000 817000 206400 Actual Operating income 253000.00 817000.00 159100 Required Operating income (Above) 165000.00 817000.00 206400.00 Residual income/(loss) 88000.00 0.00 -47300.00 Req 3-a: Investment opportunity with 17% ROI Division earning less than 17% will accept the opportunity. Decision Division A Reject Division B Reject Division C Accept Req 3-b: Division having minimum rate of return lower than ROI of new investment, shall accept the opportunity. Decision Division A Accept Division B Reject Division C Accept

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