Respuesta :
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
Those divisions whose Required rate of return is lower than or equal to 19% would accept the offer. Which is division C.
Divisions A and B has a higher required rate of return than 19% and would reject the offer.
