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:

    

Required:

1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Round your answers to 2 decimal places.)

2. Compute the residual income (loss) for each division. (Loss amounts should be indicated by a minus sign. Round your "Required rate of return" to 2 decimal places.)

3. Assume that each division is presented with an investment opportunity that would yield a 29% rate of return.

a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?

b. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?

A

B

C

Division A Division B Division C Sales $ 7,300,000 $ 11,300,000 $ 10,400,000 Average operating assets $ 1,460,000 $ 5,650,000 $ 2,080,000 Net operating income $ 467,200 $ 1,175,200 $ 379,600 Minimum required rate of return 27.00 % 20.80 % 24.00 %

Explanation / Answer

1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover

Residual income :

3a) Product A

3b) Product A

Product A Product B Product C margin 467200*100/7300000 = 6.4% 1175200*100/11300000 = 10.4% 379600*10400000 = 3.65% Turnover 7300000/1460000 = 5 11300000/5650000 = 2 10400000/208000 = 5 ROI 6.4%*5 = 32% 10.4%*2 = 20.8% 3.65%*5 = 18.25%

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