Question

Luke Company has three divisions: Peak, View, and Grand. The company has a hurdle rate of 6.51 percent. Selected operating data for the three divisions follow:  

		Peak		View		Grand
Sales revenue	$	337,000	$	224,000	$	302,000
Cost of goods sold		197,000		105,000		182,000
Miscellaneous operating expenses		44,000		34,000		39,000
Average invested assets		1,210,000		910,000		1,095,000

Required:
1. Compute the return on investment for each division. (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

	Peak		View		Grand
Return on Investment		%		%		%

2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign. Round your answers to nearest whole dollar.)

	Peak	View	Grand
Residual Income (Loss)

Answer 1

1) Calculate return on investment :

	Peak	View	Grand
Sales	337000	224000	302000
Cost of goods sold	197000	105000	182000
Operating expense	44000	34000	39000
Net operating income	96000	85000	81000
Average operating assets	1210000	910000	1095000
ROI	7.93%	9.34%	7.40%

Calculate residual income :

	Peak	View	Grand
Average operating assets	1210000	910000	1095000
Minimum rate of return	6.51%	6.51%	6.51%
Minimum operating income	78771	59241	71284.50
Net operating income	96000	85000	81000
Residual income	17229	25759	9715.50