Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C Sales $ 15,950,000 $ 28,760,000 $ 25,950,000 Average operating assets $ 3,190,000 $ 7,190,000 $ 5,190,000 Net operating income $ 733,700 $ 373,880 $ 752,550 Minimum required rate of return 6.00 % 6.50 % 14.50 % Required: 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. 2. Compute the residual income (loss) for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 7% 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?
Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C Sales $ 15,950,000 $ 28,760,000 $ 25,950,000 Average operating assets $ 3,190,000 $ 7,190,000 $ 5,190,000 Net operating income $ 733,700 $ 373,880 $ 752,550 Minimum required rate of return 6.00 % 6.50 % 14.50 % Required: 1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. 2. Compute the residual income (loss) for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 7% 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?
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter10: Evaluating Decentralized Operations
Section: Chapter Questions
Problem 5BE: Residual income The Commercial Division of Galena Company has operating income of 12,680,000 and...
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Selected sales and operating data for three divisions of different structural engineering firms are given as follows:
Division A | Division B | Division C | |||||||
Sales | $ | 15,950,000 | $ | 28,760,000 | $ | 25,950,000 | |||
Average operating assets | $ | 3,190,000 | $ | 7,190,000 | $ | 5,190,000 | |||
Net operating income | $ | 733,700 | $ | 373,880 | $ | 752,550 | |||
Minimum required |
6.00 | % | 6.50 | % | 14.50 | % | |||
Required:
1. Compute the
2. Compute the residual income (loss) for each division.
3. Assume that each division is presented with an investment opportunity that would yield a 7% 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?
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