Question
Rundle Corporation operates three investment centers. The following financial statements apply to the investment center named Bowman Division. BOWMAN DIVISIONIncome StatementFor the Year Ended December
Rundle Corporation operates three investment centers. The following financial statements apply to the investment center named Bowman Division.
BOWMAN DIVISIONIncome StatementFor the Year Ended December 31, Year 2
Sales revenue $106,080
Cost of goods sold 58,275
Gross margins 47,805
Operating expenses
Selling expenses (2,760)
Depreciation expense (4,035)
Operating income 41,010
Nonoperating item
Loss on sale of land (4,000)
Net income $37,010
BOWMAN DIVISION | |||
Balance Sheet | |||
As of December 31, Year 2 | |||
Assets | |||
Cash | $ | 12,652 | |
Accounts receivable | 40,416 | ||
Merchandise inventory | 36,300 | ||
Equipment less accumulated depreciation | 90,428 | ||
Nonoperating assets | 10,100 | ||
Total assets | $ | 189,896 | |
Liabilities | |||
Accounts payable | $ | 9,547 | |
Notes payable | 65,000 | ||
Stockholders equity | |||
Common stock | 79,000 | ||
Retained earnings | 36,349 | ||
Total liabilities and stockholder's equity | $ | 189,896 | |
1. Calculate the ROI for Bowman.
2. Rundle has a desired ROI of 11 percent. Headquarters has $93,000 of funds to assign to its investment centers. The manager of the Bowman Division has an opportunity to invest the funds at an ROI of 13 percent. The other two divisions have investment opportunities that yield only 12 percent. Calculate the new ROI for Bowman division, if the investment opportunity is adopted by Bowman.
3. Based on the original data, calculate the original residual income. Also, calculate the new residual income based on information provided in Requirement d.
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