Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C Sales $ 6,700,000 $ 10,700,000 $ 9,800,000 Average operating assets $ 1,340,000 $ 5,350,000 $ 1,960,000 Net operating income $ 388,600 $ 1,048,600 $ 298,900 Minimum required rate of return 22.00 % 19.60 % 19.00 % 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 19% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity

1. ROI = 29%, 19.6%, and 15.25%

2. RI = 7%, 0%, -3.75%

3. Division C accepts, A & B rejects.

Explanation:

                                              Division A       Division B          Division C

Sales                                    $6,700,000    $10,700,000      $9,800,000

Average operating assets  $ 1,340,000    $ 5,350,000      $ 1,960,000

Net operating income         $  388,600      $ 1,048,600       $  298,900

Required rate of return             22.00 %         19.60 %                19.00 %

1. Computation of Return on investment (ROI) for each division using the formula stated in terms of margin and turnover.

Division A = 388,600 / 1,340,000 = 29%

Division B = 1,048,600 / 5,350,000 = 19.6%

Division C = 298,900 / 1,960,000 = 15.25%

2. Compute the residual income (loss) for each division.

Division A = Residual Income = ROI - Required Return = 29% - 22% = 7%

Division B = Residual Income = ROI - Required Return = 19.6% - 19.6% = NIL

Division C = Residual Ioss = ROI - Required Return = 15.25% - 19% = -3.75%

3. Assume that each division is presented with an investment opportunity that would yield a 19% rate of return.

a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity

Those divisions whose Required rate of return is lower than or equal to 19% would accept the offer. Which is division C.

Divisions A and B has a higher required rate of return than 19% and would reject the offer.

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