Question

n the current year, the New Products Division of Testar Company had operating income of $8,000,000...

n the current year, the New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000. Testar has set a target return on investment (ROI) of 16% for each of its divisions. Which of the following statements is correct?

Multiple Choice

The New Products division yielded ROI that was lower than the target ROI.

Residual income for the New Products division was $832,000.

The New Products division yielded no residual income.

All of these are correct.

Homework Answers

Answer #1
  • All working forms part of the answer
  • Working:

A

Operating Income

$          8,000,000.00

B

Operating Assets

$        44,800,000.00

C = (A/B) x 100

Actual ROI

17.9%

D [given]

Target ROI

16%

E = B x D

Target Income

$          7,168,000.00

F = A - E

Residual Income

$              832,000.00

  • Above working shows that:

>Actual ROI is MORE than Target ROI of 16% [not “LESS than” as given in Option #1]

>Residual Income = $ 832,000

  • Hence, the correct answer is Option #2: Residual income for the New Products division was $832,000
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The Research Division of Triumph Company had operating income of $9,800,000 and operating assets of $46,600,000...
The Research Division of Triumph Company had operating income of $9,800,000 and operating assets of $46,600,000 during the current year. The Research Division has developed a potential new product that would require $10,300,000 in operating assets and would be expected to provide $3,200,000 in operating income each year. Triumph has set a target return on investment (ROI) of 22% for each of its divisions. Assuming that the new product is put into production, calculate the division's ROI
ROI and Residual Income: Impact of a New Investment The Mustang Division of Detroit Motors had...
ROI and Residual Income: Impact of a New Investment The Mustang Division of Detroit Motors had an operating income of $700,000 and net assets of $4,000,000. Detroit Motors has a target rate of return of 16 percent. (a) Compute the return on investment. (Round your answer to three decimal places.) (b) Compute the residual income. (c) The Mustang Division has an opportunity to increase operating income by $200,000 with an $950,000 investment in assets. 1. Compute the Mustang Division's return...
ROI and Residual Income: Impact of a New Investment The Mustang Division of Detroit Motors had...
ROI and Residual Income: Impact of a New Investment The Mustang Division of Detroit Motors had an operating income of $700,000 and net assets of $4,000,000. Detroit Motors has a target rate of return of 16 percent. (a) Compute the return on investment. (Round your answer to three decimal places.) Answer (b) Compute the residual income. $Answer (c) The Mustang Division has an opportunity to increase operating income by $200,000 with an $950,000 investment in assets. 1. Compute the Mustang...
The new department reported $11,250 net operating income with $75,000 average operating assets this year. The...
The new department reported $11,250 net operating income with $75,000 average operating assets this year. The department has a new investment opportunity that would increase net operating income by $4,375 with $35,000 additional investment. Q) What will be true given that the company's minimum required rate of return is 10%? Multiple Choice If the division is evaluated on the basis of Residual income, the manager of the office product division would not accept the new investment because it is bad...
Adams Company has operating assets of $20,400,000. The company’s operating income for the most recent accounting...
Adams Company has operating assets of $20,400,000. The company’s operating income for the most recent accounting period was $2,570,000. The Dannica Division of Adams controls $8,360,000 of the company’s assets and earned $1,170,000 of its operating income. Adams’s desired ROI is 9 percent. Adams has $1,050,000 of additional funds to invest. The manager of the Dannica division believes that his division could earn $142,000 on the additional funds. The highest investment opportunity to any of the company’s other divisions is...
The American Girl is a division of the Petty Company. Last year the division had sales...
The American Girl is a division of the Petty Company. Last year the division had sales of $21,520,000, average operating assets of $8,000,000 and net operating income of $538,000. The company’s minimum required rate of return is 18%. Which of the following statements is true. 1) Based on ROI, the manager is performing acceptable. 2) Based on Residual Income, the manager is performing acceptable. 3) The manager is performing unacceptable based on ROI and Residual Income. 4) None of the...
Titus Inc. Segmented Income Statements For the Current Fiscal Year Ended December 31 Southeast Division Northwest...
Titus Inc. Segmented Income Statements For the Current Fiscal Year Ended December 31 Southeast Division Northwest Division Sales $4,400,000 $2,600,000 Cost of goods sold   2,400,000      1,500,000 Gross margin 2,000,000 1,100,000 Allocated overhead (from corporate) 600,000 370,000 Selling and administrative expenses      430,000      340,000 Operating income 970,000 390,000 Income tax expense (35%)      339,500        136,500 Net income 630,500 $   253,500 Required: (1)       Using the segmented income statements presented, determine the profit margin ratio for each division.           (2)       Assume the Southeast division had average operating assets totaling...
Exercise 11-12 Evaluating New Investments Using Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] Selected...
Exercise 11-12 Evaluating New Investments Using Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] Selected sales and operating data for three divisions of different structural engineering firms are given as follows: Division A Division B Division C Sales $ 16,100,000 $ 28,880,000 $ 20,880,000 Average operating assets $ 3,220,000 $ 7,220,000 $ 5,220,000 Net operating income $ 644,000 $ 519,840 $ 626,400 Minimum required rate of return 8.00 % 8.50 % 12.00 % Required: 1. Compute the return on...
“I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...
“I know headquarters wants us to add that new product line,” said Dell Havasi, manager of Billings Company’s Office Products Division. “But I want to see the numbers before I make any move. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.” Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who...
Solomon Home Maintenance Company earned operating income of $6,865,500 on operating assets of $59,700,000 during Year...
Solomon Home Maintenance Company earned operating income of $6,865,500 on operating assets of $59,700,000 during Year 2. The Tree Cutting Division earned $1,198,290 on operating assets of $6,770,000. Solomon has offered the Tree Cutting Division $2,060,000 of additional operating assets. The manager of the Tree Cutting Division believes he could use the additional assets to generate operating income amounting to $407,880. Solomon has a desired return on investment (ROI) of 9.50 percent. Required Calculate the return on investment for Solomon,...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT