Exercise 11-12 Evaluating New Investments Using Return on Investment and Residual Income [LO3, LO4]

Three divisions of Jameson Co. report the following sales and operating data:

	Fitness Training			Spa Services			Athletic Wear
Sales	$	650,000		$	900,000		$	550,000
Average operating assets	$	130,000		$	180,000		$	110,000
Operating income	$	32,500		$	45,000		$	33,000
Minimum required rate of return		16	%		18	%		16	%

Required: 1. Compute the 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 rate of return of 26%.

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?

ROI Fitness training Spa services Athletic wear Fitness Training Spa Services Athletic Wear Residual income Fitness Training Spa Services Athletic Wear Fitness Training Spa Services Athletic Wear