Question

E10-7 Evaluating Managerial Performance Using Return on Investment, Residual Income [LO 10-4, 10-5] Orange Corp. has...

E10-7 Evaluating Managerial Performance Using Return on Investment, Residual Income [LO 10-4, 10-5]

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:
1-a. 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%.))

Fruit Division Flower Division
ROI % %
Residual Income (Loss)

1-b. 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%.))

Fruit Division Flower Division
ROI % %
Residual Income (Loss)

3. Which manager will accept the investment.

Fruit Division Manager
Flower Division Manager

Homework Answers

Answer #1

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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