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: Sales Average operating assets Net operating income Minimum required rate of return $12,360,000 $ 3,090,000 7,090,000 5,090,000 $ 494,400453,760 636,250 28,360,000 $25,450,000 7.00% 7.50 12.50% Required 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover 2. Compute the residual income (loss) for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 8% 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? Complete this question by entering your answers in the tabs below Req 1 Req 2 Req 3A Req 3B Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Margin Turnover ROI Division A Division B Division C

Explanation / Answer

1.

Working:

ROI = Margin % x Turnover

ROI = (Net operating income/Sales) x (Sales/Average operating assets)

Division A: 494400/12360000 X 12360000/3090000 = 4% x 4 = 16%

Division B: 453760/28360000 x 28360000/7090000 = 1.60% x 4 = 6.4%

Division C: 636250/25450000 X 25450000/5090000 = 2.50% x 5 = 12.5%

2.

Working:

3a.

Since minimum required rate of return for Division A and B is 7% and 7.5% respectively, they will accept the investment opportunity as it would yield a higher ROI of 8%. However, Division C with a minimum required rate of return of 12.5% will reject it.

3b.

Working:

Margin Turnover ROI Division A 4.00 % 4.00 16.00 % Division B 1.60 % 4.00 6.40 % Division C 2.50 % 5.00 12.50 %

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