ONLY PARTS D & E

Segmented Net Income, Return on Investment (ROI), and Residual Income (RI); Making Investment Decisions. Lathrop Fishing Reels, Inc., has two divisions-Fly and Cast. The Following segmented financial information is for the most recent fiscal year:

	Fly Division	Cast Division
Sales	$6,000,000	$10,000,000
Cost of Goods Sold	2,500,000	4,000,000
Allocated Overhead	375,000	625,000
Selling and administrative expenses	2,100,000	3,950,000

The Fly Division had average operating assets totaling $5,700,000 for the year, and the Cast division had average operating assets of $9,600,000 for the year. Assume the cost of capital rate is 10 percent, and the companys tax rate is 30 percent.

1. Prepare a segmented income statement using the format presented in Figure 11.3. Include the profit margin ratio for each division at the bottom of the segmented income statement.
2. Calculate return on investment for each division
3. Calculate residual income for each division.
4. Summarize the answers to parts A, B, and C using the format presented in figure 11.11. What does this information tell us about each division?
5. Assume each division of Lathrop Fishing Reels, Inc., is considering separate investment opportunities expected to yield a return of 16 percent, well above the companys minimum required rate of return of 10 percent. Each investment opportunity will require $4,000,000 in average operating assets and yield operating income of $640,000.

1. Using the information presented at the beginning of this problem, and the new investment proposal information presented previously, calculate each division's overall return on investment assuming the new investment is accepted.
2. Compare your results in requirements e.1 to each divisions return on investment Prior to the new investment (calculated in requirement b). Which divisions will likely accept the proposal and which will likely reject the proposal using return on investment as the measure? Explain.
3. using the information presented at the beginning of this problem, ending new investment proposal information presented previously, calculate each division's overall residual income assuming the new investment is accepted.
4. Compare your results in requirement e.3 to each divisions residual income prior to new investment (calculated in requirement c). Which divisions will likely accept the proposal and which will likely reject the proposal using residual income as the measure? Explain.
5. Assume the goal is to maximize company profit. Which measure do you think is best in deciding whether to accept a new investment proposal, return on investment or residual income? Explain.

	Fly Division	Cast Division
Sales	6,000,000	10,000,000
Cost of Goods sold	2,500,000	4,000,000
Gross Profit	3,500,000	6,000,000
Less: allocated overhead	375,000	625,000
Less: Selling & Admin Exp	2,100,000	3,950,000
Operating income	1,025,000	1,425,000
Less: Tax (30%)	307500	427500
Net Income (B)	717,500	997,500
Profit Margin Ratio (B/A)	0.11958333	0.09975
B.	Fly Division	Cast Division
Operating Income:	1,025,000	1,425,000
Average Operating Assets:	5,700,000	9,600,000
Return on Investments:	0.17982456	0.1484375
C.	Fly Division	Cast Division
Operating Income	1,025,000	1,425,000
Average Operating Assets	5,700,000	9,600,000
x Cost of Capital	10%	10%
Required Operating Income	570000	960000
Residual Income	455,000	465,000