Selected sales and operating data for three divisions of different structural manufacturing firms are given as follows:

Division A

Division B

Division C

Sales

$12,000,000

$14,000,000

$25,000,000

Average invested capital

$3,000,000

$7,000,000

$5,000,000

Net operating profit

$600,000

$560,000

$800,000

Minimum required rate of return

14%

10%

16%

Required:

1.Compute the return on investment (ROI) for each division using the formula stated in terms of return on sales and investment turnover. (1.5 marks)

2.Compute the residual income for each division. (1.5 marks)

3.Assume that each division is presented with an investment opportunity that would yield a 15% rate of return.

a.If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Which will probably reject the opportunity? Why? (3.5 marks)

b.If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Which will probably reject the opportunity? Why? (3.5 marks)