Question

Luke Company has three divisions: Peak, View, and Grand. The company has a hurdle rate of 5.26 percent. Selected operating data for the three divisions follow: Peak View Grand Sales revenue $ 334,000 $ 237,000 $ 315,000 Cost of goods sold 200,000 110,000 200,000 Miscellaneous operating expenses 36,000 37,000 37,000 Average invested assets 1,250,000 940,000 1,065,000

Required: 1. Compute the return on investment for each division. 2. Compute the residual income for each division.

Answer 1

	Peak	View	Grand
Sales	334,000	237,000	315,000
Less:cost of goods sold	200,000	110,000	200,000
Less:Miscellaneous operating expenses	36000	37000	37000
Net operating income	98000	90,000	78,000
Return on investment(Net operating income/Average invested assets)	(98000/1,250,000) =7.84%	(90,000/940,000) =9.57%(Approx)	(78000/1,065,000) =7.32%(Approx)
Residual income =Net operating income-(Average invested assets*Hurdle rate)	98000-(1,250,000*5.26%) =$32250	90,000-(940,000*5.26%) =$40556	78000-(1,065,000*5.26%) =$21981