Question
Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C Sales $
| Selected sales and operating data for three divisions of different structural engineering firms are given as follows: |
| Division A | Division B | Division C | |||||||
| Sales | $ | 5,600,000 | $ | 9,600,000 | $ | 8,700,000 | |||
| Average operating assets | $ | 1,120,000 | $ | 3,200,000 | $ | 1,740,000 | |||
| Net operating income | $ | 263,200 | $ | 835,200 | $ | 169,650 | |||
| Minimum required rate of return | 16.00 | % | 26.10 | % | 13.00 | % | |||
| Required: | |
| 1. | Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Round your answers to 2 decimal places.) |
| 2. | Compute the residual income (loss) for each division. (Loss amounts should be indicated by a minus sign. Round your "Required rate of return" to 2 decimal places.) |
| 3. | Assume that each division is presented with an investment opportunity that would yield a 18% rate of return. |
| a. | If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity? |
| b. | If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity? |
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