Below is an income statement for the most recently ended year for the Yard Products Company and its two divisions:

Shovel Hoe Co. Total

Sales $900,000 $600,000 $1,500,000

Variable Costs (500,000) (350,000) (850,000)

Contribution Margin.. 400,000 250,000 650,000

Segment Fixed Costs. (250,000) (100,000) (350,000)

Corporate Fixed Costs (120,000) ( 80,000) (200,000)

Net Income. 30,000 70,000 100,000

Segment average assets.. $500,000 $400,000 $900,000

Corporate average assets 300,000 200,000 500,000

Total average assets 800,000 600,000 1,400,000

The president of the company has severely criticized the manager of the Shovel Division for its dismal 3.8% ROI, which doesnt come close to the firms 12% cost of capital. The manager of Hoe Division also was criticized for an 11.7% ROI, which is slightly less than the cost of capital. Corporate fixed costs and assets are allocated to each division on the basis of sales.

Required:

Show the calculations that the president used as the basis for the criticism.

For each division and for the company as a whole, using appropriate data, calculate the following:

Return on Sales

Investment Turnover

ROI

Calculate residual income for each division.

In view of your answers to parts (b) and (c), is the presidents criticism justified?