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 |
| | |||
Thanks a lot! You saved my life))
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