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: DivisionA Division B $6,200,000 $10,200,000 $9,300,000 $1,240,000 5,100,000 $1,860,000 $ 328,600 948,600 237,150 Division C Sales Average operating assets Net operating income inimum required rate of return 19.00% 18.60% 16.00% Required 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) Margin Turnover ROI Division A Division B 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 percentage answers to 2 decimal placesi.e., 0.1234 should be entered as 12.34).) Division A Division B Division C Average operating assets Required rate of returr Required operating income Actual operating income Required operating income (above) Residual income (loss)

Explanation / Answer

Req 1: Margin % = Net Operating Income /Net Sales *100 Division A = 328,600/6200,000 *100 = 5.30% Division B = 948,600 /10200,000 *100 = 9.30% DivisionC = 237,150 /9300,000 *100 = 2.55% ROI = Net Operating Income / Average Operating Assets *100 Division A = 328600/1240,000 *100 = 26.50% Division B = 948600/5100,000 *100 = 18.60% Division C = 237150 /1860,000 *100 = 12.75% Margin % Turnover ROI% Division A 5.30% 6,200,000 26.50% Division B 9.30% 10,200,000 18.60% Division C 2.55% 9,300,000 12.75% Req 2: DIVISION A DIVISION B DIVISION C Average Operating Assets 1,240,000 5,100,000 1,860,000 Required rate of return 19% 18.60% 16% Required Operating Income 235600 948600 297600 Actual Operating Income 328600 948600 237150 Required Operating Income 235600 948600 297600 Residual Income/(Loss) 93000 0 -60450 Req 3A: If required rate of return on new investment is 21%, then Mnagement should make the following decision Division A Accept (As ROI is 26.50% , more than required rate of 21%) Division B Reject Division C Reject Req 3B: If decision is based on residual income, then management should take: Division A Accept (As its having positive residual income) Division B Reject Division C Reject

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