Selected sales and operating data for three divisions of dif

Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Sales Average operating assets Net operating income Minimum required rate of return Division A $12,280, 000 s 3,070,000 $ 601, 720 Division B Division C $35, 350, 000 $20, 280, 000 7,070, 000 $ 5,070,009 600,950 567,840 11.20% 10 , 00% 10 , 50% Required: 1. Compute the return on investment (RO) for each division using the formula stated in terms of margin and turnover 2. Compute the residual income (loss) for each division. Assume that each division is presented with an investment opportunity that would yield a 11% rate of return. a. If performance is being measured by ROI, 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? Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3A Req 38 Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Solution

Req 1 Division A Division B Division C Net Operating income 601720 600950 567840 Divided: Average Investment 3070000 7070000 5070000 ROI 19.60% 8.50% 11.20% (Net income/ Average Investtment) Req 2: Residual income Division A Division B Division C Net Operating income 601720 600950 567840 Average Investment 3070000 7070000 5070000 Target Rate of return 10% 10.50% 11.20% Target return in $ 307000 742350 567840 Rresidual income 294720 -141400 0 (Net Income-Target Income) Req 3-a: Division B will accept the proposal. Req 3-b: Division A and B will accept the proposal.