Three divisions of Jameson Co. report the following sales and operating data Fit
ID: 2560499 • Letter: T
Question
Three divisions of Jameson Co. report the following sales and operating data Fitness TrainingServices 530,000 780,000 $ 600,000 Spa Ath Wear Sales Average operating assets Operating income Minimum required rate of return $ 106,000 156,000 120,000 $ 21,200 31,200 30,000 13% 15% 13% Required: the ROl for each division, using the formula stated in terms of margin and turnover Fitness training Spa services Athletic wear 2. Compute the residual income for each division Fitness Train Residual income 3. Assume that each division is presented with an investment apportunity that would yield a rate of return of 21%. a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Fitness Training Spa Services Athletic WearExplanation / Answer
1) ROI calculation :
ROI =margin*turnover =(net operating income/sales)*(sales*average operating assets)
ROI for fitness training :
ROI = (21,200/530,000)*(530,000/106,000) = 20%
ROI for spa services :
ROI =(31,200/780,000)*(780,000/156,000) = 20%
ROI for athletic wear :
ROI =(30,000/600,000)*(600,000/120,000) = 25%
2) Residual income
fitness training
spa services
athletic wear
Average operating income
$ 1,06,000
$ 1,56,000
$ 1,20,000
Required rate of return
13%
15%
13%
Required operating income
$ 13,780
$ 23,400
$ 15,600
Actual operating income
$ 21,200
$ 31,200
$ 30,000
less: Required operating income (above)
$ 13,780
$ 23,400
$ 15,600
Residual income
$ 7,420
$ 7,800
$ 14,400
3) answer for A and B :
fitness training
spa services
athletic wear
Return on investment (ROI)
20%
20%
25%
Therefore, if the division is presented with an investment opportunity yielding 21%, it probably would
ACCEPT
ACCEPT
REJECT
Therefore, if the division is presented with an investment opportunity yielding 21%, it probably would
13%
15%
13%
Therefore, if the division is presented with an investment opportunity yielding 21%, it probably would
ACCEPT
ACCEPT
ACCEPT
a) If performance is being measured by ROI, Athletic probably would reject the 21% investment opportunity. These divisions' ROIs currently exceed 21%; accepting new investment with a 21% rate of return would reduce their overall ROIs. Fitness training and spa services Probably would accept the 21% investment opportunity, since accepting it would increase the division’s overall rate of return
b)If performance is measured by residual income, fitness training ,spa services ,and athletic wear probably would accept the 21% investment opportunity. The 21% rate of return promised by the new investment is greater than their required rates of return of 13% ,15%,and 13%, respectively, and would therefore add to the total amount of their residual income
fitness training
spa services
athletic wear
Average operating income
$ 1,06,000
$ 1,56,000
$ 1,20,000
Required rate of return
13%
15%
13%
Required operating income
$ 13,780
$ 23,400
$ 15,600
Actual operating income
$ 21,200
$ 31,200
$ 30,000
less: Required operating income (above)
$ 13,780
$ 23,400
$ 15,600
Residual income
$ 7,420
$ 7,800
$ 14,400
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