Answer:
1. ROI = 29%, 19.6%, and 15.25%
2. RI = 7%, 0%, -3.75%
3. Division C accepts, A & B rejects.
Explanation:
Division A Division B Division C
Sales $6,700,000 $10,700,000 $9,800,000
Average operating assets $ 1,340,000 $ 5,350,000 $ 1,960,000
Net operating income $ 388,600 $ 1,048,600 $ 298,900
Required rate of return 22.00 % 19.60 % 19.00 %
1. Computation of Return on investment (ROI) for each division using the formula stated in terms of margin and turnover.
Division A = 388,600 / 1,340,000 = 29%
Division B = 1,048,600 / 5,350,000 = 19.6%
Division C = 298,900 / 1,960,000 = 15.25%
2. Compute the residual income (loss) for each division.
Division A = Residual Income = ROI - Required Return = 29% - 22% = 7%
Division B = Residual Income = ROI - Required Return = 19.6% - 19.6% = NIL
Division C = Residual Ioss = ROI - Required Return = 15.25% - 19% = -3.75%
3. Assume that each division is presented with an investment opportunity that would yield a 19% rate of return.
a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity
<u>Those divisions whose Required rate of return is lower than or equal to 19% would accept the offer. Which is division C.</u>
<u>Divisions A and B has a higher required rate of return than 19% and would reject the offer.</u>
