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Three divisions of Jameson Co. report the following sales and operating data: Fitness Training Spa Services Athletic Wear Sales $ 600,000 $ 850,000 $ 700,000
Three divisions of Jameson Co. report the following sales and operating data: |
Fitness Training | Spa Services | Athletic Wear | |||||||
Sales | $ | 600,000 | $ | 850,000 | $ | 700,000 | |||
Average operating assets | $ | 120,000 | $ | 170,000 | $ | 140,000 | |||
Operating income | $ | 30,000 | $ | 42,500 | $ | 42,000 | |||
Minimum required rate of return | 14 | % | 16 | % | 14 | % | |||
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Required: | |
1. | Compute the ROI for each division, using the formula stated in terms of margin and turnover. |
2. | Compute the residual income for each division. |
3. | Assume that each division is presented with an investment opportunity that would yield a rate of return of 26%. |
a. | If performance is being measured by ROI, which division or divisions will probably accept the opportunity? |
b. | If performance is being measured by residual income, which division or divisions will probably accept the opportunity? |
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