The following is partial information for Tonopah Companys most recent year of operation. Tonopah manufactures childrens shoes

The following is partial information for Tonopah Company’s most recent year of operation. Tonopah manufactures children’s shoes and categorizes its operations into two divisions: Girls and Boys.

Required:
1. Without making any calculations, determine whether each division’s return on investment is above or below Tonopah’s hurdle rate. How can you tell?
2. Determine the missing amounts in the preceding table.
3. What is Tonopah’s hurdle rate?
4. Suppose Tonopah has the opportunity to invest additional assets to help expand the company’s market share. The expansion would require an investment of $6,200,000 and would generate $800,000 in additional income. From Tonopah’s perspective, is this a viable investment? Why or why not?
5. Suppose the two divisions would equally share the investment and profits from the expansion project. If return on investment is used to evaluate performance, what will each division think about the proposed project?
6. In requirement 5, will either manager’s preference change if residual income is used to measure division performance? Explain youranswer.

Transcribed Image Text:

Sales revenue Average invested assets Net operating income Profit margin Investment turnover Return on investment Residual income Girls Division $2,000,000 500,000 0.8 $ 260,000 Boys Division 2 $1,250,000 300,000 15% 2 $180,000