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Q.6 Financial data for three different divisions of the same company, for last year, appear below: Division A % B % C % Company Total % Sales $3,200,000 $3,500,000 $5,000,000 Variable Costs 1,450,000 1,750,000 2,750,000 Traceable Fixed Costs 1,250,000 1,350,000 1,450,000 Segment Margin Common Fixed Costs: 1,500,000 PART I: Complete the above table showing the Contribution Margin Ratio(CMR), and the segment margin for each of the segments. Determine the CMR for the company as a whole . If the company were to add a new division, what information from the above would you use to assist in the decision-making? Division A B C Company Total Average Operating Assets $4,000,000 $4,375,000 $4,000,000 [AOA] Segment Margin Turnover [T/O] ROI Minimum Required Rate of Return for the industry [MRROR] @ 8% Residual Income [RI] Required: Complete the above comparison and answer the questions that follow

Here are the formulas for:

Margin - > OI Turnover - > Sales ROI -> Margin x Turnover

Sales AOA

RI -> OI (MRROR x AOA)

1. Compute each divisions turnover and ROI for the reporting period. Explain what is meant by turnover as used in this analysis

2. In the industry the average MRROR is 8%. Determine the residual income (RI) for each division. What is the significance of the MRROR? Why is RI a better measure of performance than ROI?

3. If sales in the industry increased by 10%, without any increase in operating assets, which division would show the largest change in operating income? Why?

4. If the company were to undertake an expansion program that would require new investments of $1,000,000 in operating assets, which division would you recommend in order to produce the highest return? Why?

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