Question
Wally Steel Division is a unit of Wally Industries, which produces tool and die machinery for manufacturers. The steel division operates as one of several
Wally Steel Division is a unit of Wally Industries, which produces tool and die machinery for manufacturers. The steel division operates as one of several separate investment centres of Wally Industries.
The investment centres are evaluated on the basis of ROI. Management bonuses are also based on ROI. All investments in operating assets are expected to earn a minimum rate of return of 11%.
Divisional ROI of the steel division has ranged from 13% to 16% since it was acquired by the parent company. During the past year, the steel division had an investment opportunity that would yield an estimated rate of return of 13%. But the divisional management decided against the investment because it believed the investment would decrease the divisions overall ROI.
Last years income statement for Wally Steel Division is given below. The divisions operating assets employed were $32,480,000 at the end of the year, which represents an 12% increase over the previous year-end balance.
WALLY STEEL DIVISION | |||||
Divisional Income Statement | |||||
For the Year Ended December 31 | |||||
Sales | $ | 46,446,400 | |||
Cost of goods sold | 37,157,100 | ||||
Gross margin | 9,289,300 | ||||
Less: Operating expenses: | |||||
Selling expenses | $ | 3,344,000 | |||
Administrative expenses | 2,229,600 | 5,573,600 | |||
Net operating income | $ | 3,715,700 | |||
Required:
1. Compute the average operating assets for the year.
2. Compute the ROI of the division. State the ROI in terms of margin and turnover. (Round intermediate calculation to 2 decimal places. Enter your percentage answer rounded to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)
3. Compute the residual income for the steel division.
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