Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C Sales $ 12,920,000 $ 28,920,000 $ 26,150,000 Average operating assets $ 3,230,000 $ 7,230,000 $ 5,230,000 Net operating income $ 516,800 $ 462,720 $ 758,350 Minimum required rate of return 7.00% 7.50% 14.50% Required: 1. Compute the margin, turnover, and return on investment (ROI) for each division. 2. Compute the residual income (loss) for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 8% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity?
Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C Sales $ 12,920,000 $ 28,920,000 $ 26,150,000 Average operating assets $ 3,230,000 $ 7,230,000 $ 5,230,000 Net operating income $ 516,800 $ 462,720 $ 758,350 Minimum required rate of return 7.00% 7.50% 14.50% Required: 1. Compute the margin, turnover, and return on investment (ROI) for each division. 2. Compute the residual income (loss) for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 8% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Exercise 11-14 (Algo) Evaluating New Investments Using Return on Investment (ROI) and Residual Income [LO11-1, LO11-2]
Selected sales and operating data for three divisions of different structural engineering firms are given as follows:
| Division A | Division B | Division C | |
|---|---|---|---|
| Sales | $ 12,920,000 | $ 28,920,000 | $ 26,150,000 |
| Average operating assets | $ 3,230,000 | $ 7,230,000 | $ 5,230,000 |
| Net operating income | $ 516,800 | $ 462,720 | $ 758,350 |
| Minimum required |
7.00% | 7.50% | 14.50% |
Required:
1. Compute the margin, turnover, and return on investment (ROI) for each division.
2. Compute the residual income (loss) for each division.
3. Assume that each division is presented with an investment opportunity that would yield a 8% rate of return.
a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity?
b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity?
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