Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C Sales $ 12,000,000 $ 14,000,000 $ 25,000,000 Average operating assets $ 3,000,000 $ 7,000,000 $ 5,000,000 Net operating income $ 600,000 $ 560,000 $ 800,000 Minimum required rate of return 14 % 10 % 16 % Required: 1. Compute the margin, turnover, and return on investment (ROI) for each division. 2. Compute the residual income (loss) for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 15% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity?
Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C Sales $ 12,000,000 $ 14,000,000 $ 25,000,000 Average operating assets $ 3,000,000 $ 7,000,000 $ 5,000,000 Net operating income $ 600,000 $ 560,000 $ 800,000 Minimum required rate of return 14 % 10 % 16 % Required: 1. Compute the margin, turnover, and return on investment (ROI) for each division. 2. Compute the residual income (loss) for each division. 3. Assume that each division is presented with an investment opportunity that would yield a 15% rate of return. a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity?
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter10: Evaluating Decentralized Operations
Section: Chapter Questions
Problem 11E: The operating income and the amount of invested assets in each division of Conley Industries are as...
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Selected sales and operating data for three divisions of different structural engineering firms are given as follows:
| Division A | Division B | Division C | |||||||
| Sales | $ | 12,000,000 | $ | 14,000,000 | $ | 25,000,000 | |||
| Average operating assets | $ | 3,000,000 | $ | 7,000,000 | $ | 5,000,000 | |||
| Net operating income | $ | 600,000 | $ | 560,000 | $ | 800,000 | |||
| Minimum required |
14 | % | 10 | % | 16 | % | |||
Required:
1. Compute the margin, turnover, and return on investment (ROI) for each division.
2. Compute the residual income (loss) for each division.
3. Assume that each division is presented with an investment opportunity that would yield a 15% rate of return.
a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity?
b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity?
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Step 1 Introduction
VIEWStep 2 1) Computation of margin, turnover and return in investment for each division
VIEWStep 3 1) Answer
VIEWStep 4 Working note
VIEWStep 5 2) Computation of residual Income of each division
VIEWStep 6 2. Answer
VIEWStep 7 3) a) Evaluation of proposal on the basis of ROI if yield rate of return is 15%
VIEWStep 8 3 b) Evaluation of proposal on the basis of residual Income yield rate of return is 15%
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