Selected sales and operating data for three divisions of different structural engineering firms are given as follows:
Division A Division B Division C
Sales $12,000,000 $14,000,000 $25,000,000
Average operating assets $3,000,000 $7,000,000 $5,000,000
Net operating income $600,000 $560,000 $800,000
Minimum required rate of return 14% 10% 16%
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 for each division.
3. Assume that each division is presented with an investment opportunity that would yield a 15% rate of return.
a. If performance is being measured by ROI, which division or divisions will probably accept opportunity? Reject? Why?
b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject? Why?
Division A Division B Division C
Sales $12,000,000 $14,000,000 $25,000,000
Average operating assets $3,000,000 $7,000,000 $5,000,000
Net operating income $600,000 $560,000 $800,000
Minimum required rate of return 14% 10% 16%
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 for each division.
3. Assume that each division is presented with an investment opportunity that would yield a 15% rate of return.
a. If performance is being measured by ROI, which division or divisions will probably accept opportunity? Reject? Why?
b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject? Why?
