Question

	New car Division	Used car divisin
Sales	9,000,000	18,000,000
Costs: COGS	3,300,000	8,700,000
Overhead	1,050,000	2,550,000
Selling/adm exp	585,000	630,000
Total costs	4,9350,000	11,880,000
Operating Income	4,065,000	6,120,000
Tax 40 %	1,626,000	2,448,000
Net Income	2,439,000	3,672,000
Average Operating Costs	17,400,000	22,800,000
Cost of Capital	15 %	15%

a. calculate the ROI for each division given the above information

b. calculate the RI for each division given the above information?

Answer 1

Answer a:

ROI = Net Income / Average Operating capital =

New car Division: ROI = 2,439,000 / 17,400,000 = 14.02%

Used car division: ROI = 3,672,000 / 22,800,000 = 16.11%

Hence:

New car Division: ROI = 14.02%

Used car division: ROI = 16.11%

Answer b:

RI (Residual Income) = Net Income - Capital charge = Net Income - Average Operating capital * Cost of Capital

New car Division: RI = 2,439,000 - 17,400,000 * 15% = -171,000

Used car division: RI = 3,672,000 - 22,800,000 * 15% = 252,000

Hence:

New car Division: RI = - 171,000 or (171,000)

Used car division: RI = 252,000