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 $6,800,000 $10,800,000 $9,900,000 $1,360,000 2,700,000 $1,980,000 401,200 1,069,200 311,850 23.00% 39 60% 20.00% 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.) Margin Turnover ROI Division A 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" to 2 decimal places.) Division A Division B Division C Average operating assets Required rate of return Required operating income DOLL

Explanation / Answer

1. Computation of ROI for Each Division Margin Turnover ROI Division A 5.90% 5 29.50% Division B 9.90% 4 39.60% Division C 3.15% 5 15.75% Working Note for Calculation of Margin % and Turnover Margin % Div A=401200/6800000*100 Margin % DivB=1069200/10800000*100 Margin % DIV C=311850/9900000*100 Turnover for Div A=6800000/1360000 Turnover for DivB=10800000/2700000 Turnover for DIV C=9900000/1980000 2. Computation of Residual Income Division A Division B Division C Average operating Asset $1,360,000 $2,700,000 $1,980,000 Required rate of return 23% 39.60% 20% Required Operating income $312,800 $1,069,200 $396,000 Actual Operating Income $401,200 $1,069,200 $311,850 Required Operating Income (above) $312,800 $1,069,200 $396,000 Residual Income $88,400 $0 ($84,150) 3.a. Decision Criteria Division A Reject 29.5% > 25% Division B Reject 39.60% > 25% Division C Accept 15.75% < 25% 3.b. Decision Criteria Division A Accept 23% < 25% Division B Reject 39.60% > 25% Division C Accept 20% < 25%

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