Selected sales and operating data for three divisions of three different companies are given below:
Explanation: 1.
2.
3. a. & b.
Division A  Division B  Division C  
Sales  $  6,000,000  $  10,000,000  $  8,000,000  
Average operating assets  $  1,500,000  $  5,000,000  $  2,000,000  
Net operating income  $  300,000  $  900,000  $  180,000  
Minimum required rate of return  15  %  18  %  12  %  

Required:  
1. 
Compute the return on investment (ROI) for each division, using the formula stated in terms of margin and turnover. (Do not round intermediate calculations. Omit the "%" sign in your response.)

ROI  
Division A  % 
Division B  % 
Division C  % 

2. 
Compute the residual income for each division. (Negative
amounts should be indicated by a minus sign. Leave no cells blank  be
certain to enter "0" wherever required. Omit the "$" sign in your
response.)

Division A  Division B  Division C  
Residual income  $  $  $ 

3. 
Assume that each division is presented with an investment opportunity that would yield a rate of return of 17%.

a. 
If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?

Division A  Reject 
Division B  Reject 
Division C  Accept 

b. 
If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?

Division A  Accept 
Division B  Reject 
Division C  Accept 

Explanation: 1.
Computation of ROI. 
Division A:  ROI  = 
$300,000
 × 
$6,000,000
 = 5% × 4 = 20% 
$6,000,000  $1,500,000 
Division B:  ROI  = 
$900,000
 × 
$10,000,000
 = 9% × 2 = 18% 
$10,000,000  $5,000,000 
Division C:  ROI  = 
$180,000
 × 
$8,000,000
 = 2.25% × 4 = 9% 
$8,000,000  $2,000,000 
2.
Division A  Division B  Division C  
Average operating assets  $  1,500,000  $  5,000,000  $  2,000,000  
Required rate of return  ×15  %  ×18  %  ×12  %  
         
Minimum required return  $  225,000  $  900,000  $  240,000  
         
Actual net operating income  $  300,000  $  900,000  $  180,000  
Minimum required return (above)  225,000  900,000  240,000  
         
Residual income  $  75,000  $  0  $  (60,000)  
         

3. a. & b.
Division A  Division B  Division C  
Return on investment (ROI)  20%  18%  9% 
Therefore, if the division is presented with an investment opportunity yielding 17%, it probably would  Reject  Reject  Accept 
Minimum required return for computing residual income  15%  18%  12% 
Therefore, if the division is presented with an investment opportunity yielding 17%, it probably would  Accept  Reject  Accept 
