TE10-7 Evaluating Managerial Performance Using Return on Investment, Residual Income [LO 10-4, 10-5]

Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is available for each division:

	Fruit Division			Flower Division
Sales revenue	$	1,320,000		$	1,980,000
Cost of goods sold and operating expenses		990,000			1,485,000
Net operating income	$	330,000		$	495,000
Average invested assets	$	5,000,000		$	1,980,000

Orange has established a hurdle rate of 5 percent. Required: 1-a. Compute each divisions return on investment (ROI) and residual income for last year. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.)) ROI:

Residual Income:

1-b. Determine which manager seems to be performing better.

	Fruit Division
	Flower Division

2. Suppose Orange is investing in new technology that will increase each divisions operating income by $142,000. The total investment required is $2,100,000, which will be split evenly between the two divisions. Calculate the ROI and return on investment for each division after the investment is made. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.)) ROI :?

Residual Income (Loss) :? 3. Which manager will accept the investment. Fruit or flower?