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Selected sales and operating data for three divisions of different structural engineering firms are given as...

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Accounting

Selected sales and operating data for three divisions ofdifferent structural engineering firms are given as follows:Division A Division B Division C Sales $ 12,600,000 $ 35,750,000 $20,600,000 Average operating assets $ 3,150,000 $ 7,150,000 $5,150,000 Net operating income $ 516,600 $ 572,000 $ 597,400Minimum required rate of return 9.00 % 9.50 % 11.60 % Required:

1. Compute the return on investment (ROI) for each divisionusing the formula stated in terms of margin and turnover.

2. Compute the residual income (loss) for each division.

3. Assume that each division is presented with an investmentopportunity that would yield a 10% rate of return.

a. If performance is being measured by ROI, which division ordivisions will probably accept or reject the opportunity?

b. If performance is being measured by residual income, whichdivision or divisions will probably accept or reject theopportunity?

Answer & Explanation Solved by verified expert
4.4 Ratings (810 Votes)

1)
Margin Turnover ROI
Division A 4.10% 4 16.40%
Division B 1.60% 5 8.00%
Division C 2.90% 4 11.60%
Margin = Net operating income/sales
Turnover = sales/Average operating assets
ROI         = margin * turnover
2) Division A Division B Division C
Average operating assets 3,150,000 7,150,000 5,150,000
Required rate of return 9% 9.5% 11.6%
required operating income 283500 679250 597400
Actual operating income 516,600 572,000 597,400
Required operating income abo 283,500 679,250 597,400
residual income (loss) 233,100 -107,250 0
Residual income = net operating income -(average operating assets*min
                                                                                 Required rate of return)
3a) Division A Reject
Division B Accept
Division C Reject
3b) Division A Accept
Division B Accept
Division C Reject

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