E107 Evaluating Managerial Performance Using Return on Investment, Residual Income [LO 104, 105]
Orange Corp. has two divisions: Fruit and Flower. The following
information for the past year is available for each division:
Fruit Division  Flower Division  
Sales revenue  $  1,560,000  $  2,340,000  
Cost of goods sold and operating expenses  1,170,000  1,755,000  
Net operating income  $  390,000  $  585,000  
Average invested assets  $  4,875,000  $  2,437,500  
Orange has established a hurdle rate of 6
percent.
Required:
1a. Compute each division’s return on investment
(ROI) and residual income for last year. (Enter your ROI
answers as a percentage rounded to two decimal places, (i.e.,
0.1234 should be entered as 12.34%.))

1b. Determine which manager seems to be
performing better.
Fruit Division  
Flower Division 
2. Suppose Orange is investing in new technology
that will increase each division’s operating income by $125,000.
The total investment required is $2,000,000, which will be split
evenly between the two divisions. Calculate the ROI and return on
investment for each division after the investment is made.
(Enter your ROI answers as a percentage rounded to two
decimal places, (i.e., 0.1234 should be entered as
12.34%.))

3. Which manager will accept the investment.
Fruit Division Manager  
Flower Division Manager 
1(a)
Q1(b)
Manager of flower division is performing better because it has a better return on investment and thus residual income is also higher.
Q2
Q3.
Fruit division manager will accept the investment because his ROI increases after the proposed investment.
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