Question

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.

2. Compute the residual income (loss) for each division.

Answer 1

1) ROI

	Division A	Division B	Division C
Margin	703800/15300000 = 4.6%	529500/35300000 = 1.5%	526240/20240000 = 2.6%
Turnover	15300000/3060000 = 0.50	35300000/7060000 = 5	20240000/5060000 = 4
ROI	4.6*.5 = 2.3%	1.5*5 = 7.5%	4*2.6 = 10.4%

2) Residual income

	Division A	Division B	Division C
Net operating income	703800	529500	526240
Minimum operating income	3060000*9% = 275400	7060000*9.5% = 670700	5060000*10.40% = 526240
Residual income	428400	-141200	0