Question

Vaughan Company has 3 divisions with the following information:

Division A | Division B | Division C | |

Sales | $750,000 | $700,000 | $360,000 |

Net Operating Income | $30,000 | $35,000 | $36,000 |

Average Operating Assets | $200,000 | $500,000 | $300,000 |

Minimum Required Rate of Return | 8% | 15% | 9% |

Assume that each division was presented with an investment
opportunity that would yield a rate of return of 11%. If
performance is being measured by residual income **a.both
division A and C would invest in the project, b.only division B
will would invest in the project, c.only division A would invest in
the project, d.only division C will would invest in the project,
e.all of the divisions would invest in the project, f.none of the
divisions would invest in the project because a.11% is equal to or
higher than their minimum required rate of return, b.11% is greater
than their current ROI, c.11% is less than their current
ROI**

Answer #1

residual income = Average operating assets (Actual rate of return-minimum required rate of return)

Ifthe performance is based on residual income, the project with actual rate of return> Minimum required rate of return would be selected

any project whose rate of return< minimum required rate of return shall be rejected

Here Actual return of new opportunity is 11%

So project with minimum required return< 11% will be accepted

A | B | C | |||

Minumum rate of return | 8% | 15% | 9% | ||

Actual rate of return | 11% | 11% | 11% | ||

decision | Accept | Reject | Accept | ||

Actual return>Minimum return | Actual return<Minimum return | Actual return> minimum return |

**a)both division A and C would invest in the
project,**

**a)11% is equal to or higher than their minimum required
rate of return,**

Wescott Company has three divisions: A, B, and C. The company
has a hurdle rate of 8 percent. Selected operating data for the
three divisions are as follows:
Division A
Division B
Division C
Sales revenue
$
1,260,000
$
939,000
$
920,000
Cost of goods sold
779,000
689,000
668,000
Miscellaneous operating
expenses
65,000
53,000
54,000
Interest and taxes
49,000
42,000
42,000
Average invested assets
8,473,000
1,977,000
3,254,000
Wescott is considering an expansion project in the upcoming year
that will cost...

Sapsora Company uses ROI to measure the performance of its
operating divisions and to reward division managers. A summary of
the annual reports from two divisions is shown as follows. The
company’s weighted-average cost of capital is 10 percent.
Division
A
Division
B
Total assets
$
6,080,000
$
8,670,000
Current liabilities
$
550,000
$
1,750,000
After-tax operating income
$
1,020,000
$
1,159,000
ROI
24
%
12
%
a. Which division is more profitable in
absolute dollars?
b. Compute the EVA...

Sapsora Company uses ROI to measure the performance of its
operating divisions and to reward division managers. A summary of
the annual reports from two divisions is shown as follows. The
company’s weighted-average cost of capital is 12 percent.
Division A
Division B
Total assets
$
6,000,000
$
8,750,000
Current liabilities
$
500,000
$
1,750,000
After-tax operating income
$
1,000,000
$
1,180,000
ROI
25
%
14
%
a. Which division is more profitable in
absolute dollars?
b. Compute the EVA...

Selected sales and operating data for three divisions of
different structural engineering firms are given as follows:
Division A
Division B
Division C
Sales
$
6,000,000
$
10,000,000
$
9,100,000
Average operating assets
$
1,200,000
$
2,500,000
$
1,820,000
Net operating income
$
306,000
$
910,000
$
213,850
Minimum required rate of return
20.00
%
36.40
%
17.00
%
Required:
1. Compute the return on investment (ROI) for each division
using the formula stated in terms of margin and turnover....

Selected sales and
operating data for three divisions of different structural
engineering firms are given as follows:
Division A
Division B
Division C
Sales
$
12,400,000
$
35,500,000
$
20,400,000
Average
operating assets
$
3,100,000
$
7,100,000
$
5,100,000
Net operating
income
$
508,400
$
426,000
$
510,000
Minimum required
rate of return
7.00
%
7.50
%
10.00
%
Required:
1. Compute the return
on investment (ROI) for each division using the formula stated in
terms of margin and turnover....

Chapter 10 Question 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
$
6,800,000
$
10,800,000
$
9,900,000
Average operating assets
$
1,360,000
$
2,700,000
$
1,980,000
Net operating income
$
401,200
$
1,069,200
$
311,850
Minimum required rate of return
23.00
%
39.60
%
20.00
%
Required:
1. Compute the return on investment (ROI) for each division
using the formula stated in terms...

Capital Investments has three divisions. Each division's
required rate of return is 15%. Planned operating results for 2018
are as follows: Division Operating income Investment A $15,000,000
$100,000,000 B $25,000,000 $125,000,000 C $11,000,000 $ 50,000,000
The company is planning an expansion, which will require each
division to increase its investments by $25,000,000 and its income
by $4,500,000.
Required: a. Compute the current ROI for each division. b.
Compute the current residual income for each division. c. Rank the
divisions according...

Selected sales and
operating data for three divisions of different structural
engineering firms are given as follows:
Division A
Division B
Division C
Sales
$
15,300,000
$
35,300,000
$
20,240,000
Average
operating assets
$
3,060,000
$
7,060,000
$
5,060,000
Net operating
income
$
703,800
$
529,500
$
526,240
Minimum required
rate of return
9.00
%
9.50
%
10.40
%
Required:
1. Compute the return
on investment (ROI) for each division using the formula stated in
terms of margin and turnover....

Forchen, Inc., provided the following information for two of its
divisions for last year:
Small Appliances
Division
Cleaning Products
Division
Sales
$34,630,000
$31,340,000
Operating income
2,346,100
1,252,900
Operating assets, January 1
6,399,000
5,770,000
Operating assets, December 31
7,590,000
6,380,000
Forchen, Inc., requires an 9 percent minimum rate of return.
Required:
1. Calculate residual income for the Small
Appliances Division.
$
2. Calculate residual income for the Cleaning
Products Division.
$
3. What if the
minimum required rate of return...

ROI and Residual Income:Basic Computations
Watkins Associated Industries is a highly diversified company
with three divisions: Trucking, Seafood, and Construction. Assume
that the company uses return on investment and residual income as
two of the evaluation tools for division managers. The company has
a minimum desired rate of return on investment of 10 percent with a
30 percent tax rate. Selected operating data for three divisions of
the company follow.
Trucking Division
Seafood Division
Construction Division
Sales
$1,000,000
$690,000
$900,000...

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