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 Division B $6,400,000 S10,400,000 $9,500,000 $1,600,000 S 5,200,000 $2,375,000 $ 352,000 S 988,000 261,250 Division C Sales Average operating assets Net operating income Minimum required rate of return 18.00% 19.00% 15.00% 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 B Division C imes imes imes 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 Actual operating income Required operating income (above) Residual income (loss)

Explanation / Answer

Answer:- Retun on Investment:- Margin*Turnover

           =(Net operating income/Sales)*(Sales*Average operating assets)

Division A =($352000/$6400000)*($6400000*$1600000)

          =5.5%*4 =22%

Division B =($988000/$10400000) *($10400000/$5200000)

             =9.5%*2 =19%

Division C =($261250/$9500000) *($9500000/$2375000)

             =2.75%*4 =11%

2)-

Calculation of Residual Income Division A B C Average Opreating Assets $ (a) 1600000 5200000 2375000 Net opreating income $ (b) 352000 988000 261250 Minimum required return on average opreating assets (c) $1600000*18% =$288000 $5200000*19%=988000 $2375000*15%=356250 Residual Income/ (loss) $ (d=b-c) 64000 0 -95000

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