1. Compute each division's margin, turnover, and return on investment (ROI). 2. Compute each division's residual income (loss). 3. Assume each division is presented with an investment opportunity yielding a 15% rate of return. a. If performance is being measured by ROI, which division or divisions will accept the opportunity? b. If performance is being measured by residual income, which division or divisions will accept the opportunity?
1. Compute each division's margin, turnover, and return on investment (ROI). 2. Compute each division's residual income (loss). 3. Assume each division is presented with an investment opportunity yielding a 15% rate of return. a. If performance is being measured by ROI, which division or divisions will accept the opportunity? b. If performance is being measured by residual income, which division or divisions will accept the opportunity?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Selected sales and operating data for three divisions of different structural engineering firms are given below:
Division C
$ 25,000,000
$5,000,000
$ 800,000
16%
Sales
Average operating assets
Net operating income
Minimum required rate of return
Required:
Division A
$ 12,000,000
$3,000,000
$ 600,000
14%
Division B
$ 14,000,000
$7,000,000
$ 560,000
10%
1. Compute each division's margin, turnover, and return on investment (ROI).
2. Compute each division's residual income (loss).
3. Assume each division is presented with an investment opportunity yielding a 15% rate of return.
a. If performance is being measured by ROI, which division or divisions will accept the opportunity?
b. If performance is being measured by residual income, which division or divisions will accept the opportunity?
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Step 1: Define Ratio analysis
VIEWStep 2: Compute margin, turnover and ROI
VIEWStep 3: Compute return on investment
VIEWStep 4: Working notes
VIEWStep 5: Computation of residual Income
VIEWStep 6: Final answer of residual income
VIEWStep 7: Solution to Q 3 A
VIEWStep 8: Solution to Question 3B
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