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 A 6,700,000 $ 1,340,000 $388,600 Division s 10,700,000 9,800,000 $ 5,350,000 1,960,000 $1,048,600 $ 298,900 Division C Sales Average operating assets Net operating income Minimum required rate of return 22.00% 19 . 60% 19.00% 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 24% rate of return. a. If performance is being measured by ROl, 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?

Explanation / Answer

Margin = Net operating income/Sales Turnover = Sales/Average operating assets ROI = Margin*Turnover 1 Division A: Margin = 388600/6700000= 5.80% Turnover = 6700000/1340000= 5 ROI = 5.8%*5= 29% Division B: Margin = 1048600/10700000= 9.80% Turnover = 10700000/5350000= 2 ROI = 9.8%*2= 20% Division C: Margin = 298900/9800000= 3.05% Turnover = 9800000/1960000= 5 ROI = 3.05%*5= 15% 2 Division A Division B Division C Net operating income 388600 1048600 298900 Required operating income 294800 1048600 372400 Residual income 93800 0 -73500 3a Division A will reject and Division B & C will accept b All the divisions will accept the opprtunity

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