105) The Calculating Fashion Company has two operating divisions: North and South. The
following information was collected from its financial statements.
North South
Operating income $ 15,375 $ 9,160
Sales 90,100 128,445
Average operating assets 47,620 37,690
Required:
Compute the following ratios for each division:
a. Profit margin
b. Asset turnover
c. Return on investment (ROI)
106) The Calculating Fashion Company has two operating divisions: North and South. The
following information was collected from its financial statements.
North South
Operating income $ 15,375 $ 9,160
Sales 90,100 128,445
Average operating assets 47,620 37,690
Required:
The South Division has a goal to increase its ROI to 30% by the end of next year. Compute the
increase (decrease) required in each of the following items in order to achieve this goal.
a. Operating assets
b. Total costs
c. Sales
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107) You are the manager of an operating division of a manufacturing company. Your division
has $4,500,000 in assets, and your budgeted income statement for the current year follows:
Revenues $ 8,000,000
Cash costs:
Variable 1,000,000
Fixed 3,750,000
Depreciation 1,375,000
Your company uses a performance evaluation and bonus plan, which is based on return on
investment (ROI) computed with end-of-year gross asset balances.
In October, you discover that you can purchase a new machine for $3,250,000, which will enable
you to expand the output of your division and save costs. The machine would have a salvage
value of $250,000 and would be depreciated over 3 years using the straight-line method. It will
increase output by 10% while reducing cash fixed costs by 5%. If you accept the machine, it will
be installed in late December, but no depreciation will be taken on the new machine this year.
If you do buy this machine, you will have to dispose of the machine you are now using, which
you just purchased last January. That machine cost you $2,500,000 but has no salvage value.
$750,000 of the depreciation on the income statement is depreciation for this machine. In the
ROI calculations, the company includes any gains or losses for equipment disposal in income for
the year. You may safely ignore all taxes for this analysis.
Required:
a. What is your division’s ROI this year if you do not acquire the new machine?
b. What is your division’s ROI this year if you do acquire the new machine?
c. What is your division’s expected ROI next year if the machine is acquired and meets
expectations?
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108) The ArtMart Company has three divisions: X Division, Y Division, and Z Division.
Operating results for the three divisions for last year were as follows:
Division X Division Y Division Z
Residual income $ 98,400 $ 27,200 $ 2,000
Net operating income 188,600 115,600 52,000
Average operating assets 820,000 680,000
400,000
Sales 1,640,000 1,445,000 1,040,000
Profit margin 11.5 % 8.0 % 5.0 %
Corporate headquarters is offering an investment opportunity to each of the divisions. The
opportunity will yield an operating income of $35,000, based on an average operating investment
of $246,000.
Required:
a. If the divisions are being evaluated using return on investment (ROI), what will be the
decision (accept or reject) of each division regarding this opportunity? Support your answer with
the appropriate calculations.
b. If the divisions are being evaluated using residual income, what will be the decision (accept or
reject) of each division regarding this opportunity? Support your answer with the appropriate
calculations.
109) The following information is available about the status and operations for Division A of
Boxwood Company, which has a minimum required ROI of 20%. Answer each item
independently of the others.
Division A
Divisional investment $ 200,000
Divisional profit $ 70,000
Divisional sales $ 400,000
Required:
a. Compute the ROI for Division A.
b. Division A could increase its profit by $16,000 by increasing its investment by $60,000.
Compute its new ROI.
c. Division A could increase its profit margin ratio by one percentage point (for example: from
12% to 13%), without increasing total sales or investment. Compute its new ROI.
d. Division A could reduce its investment so that its asset turnover increased by one time, while
holding total sales and profit constant. Compute its new ROI.
110) The following information is available about the status and operations for Division B of
Boxwood Company, which has a minimum required ROI of 20%. Answer each item
independently of the others.
Division B
Divisional investment $ 1,500,000
Divisional profit $ 550,000
Divisional sales $ 3,600,000
Required:
a. Compute the ROI for Division B.
b. Division B could increase its profit by $25,000 by increasing its investment by $100,000.
Compute its new ROI.
c. Division B could increase its profit margin ratio by one percentage point (for example: from
13% to 14%), without increasing total sales or investment. Compute its new ROI.
d. Division B could reduce its investment so that its asset turnover increased by one time, while
holding total sales and profit constant. Compute its new ROI.
111) Radner Industries is a division of a major corporation. Last year the division had total sales
of $23,380,000, net operating income of $2,828,980, and average operating assets of $7,000,000.
The company’s minimum required rate of return is 12%.
Required:
a. What is the division’s margin?
b. What is the division’s turnover?
c. What is the division’s return on investment (ROI)?
112) Danali Fabrication is a division of a major corporation. Last year the division had total sales
of $21,120,000, net operating income of $2,006,400, and average operating assets of $6,000,000.
The company’s minimum required rate of return is 12%.
Required:
What is the division’s return on investment (ROI)?
113) The following information is available about the Appliance Division of Rainier Company.
Rainier requires a return of 9% from all divisions.
Appliance Division Earnings from Operations $ 18,462,000
Appliance Division Sales $ 112,600,000
Appliance Division Identifiable Assets $ 173,700,000
Required:
a. Compute the ROI for the Appliance Division.
b. Compute the residual income for the Appliance Division.
114) Bleu Stone is a division of a major corporation. The following data are for the latest year of
operations:
Sales $ 30,000,000
Net operating income $ 1,170,000
Average operating assets $ 8,000,000
The company’s minimum required rate of return 18 %
Required:
a. What is the division’s margin?
b. What is the division’s turnover?
c. What is the division’s return on investment (ROI)?
d. What is the division’s residual income?
115) Bleu Stone is a division of a major corporation. The following data are for the latest year of
operations:
Sales $ 33,040,000
Net operating income $ 1,453,760
Average operating assets $ 8,000,000
The company’s minimum required rate of return 18 %
Required:
a. What is the division’s return on investment (ROI)?
b. What is the division’s residual income?
116) Edmonson Corporation had net operating income of $150,000 and average operating assets
of $500,000. The company requires a return on investment of 19%.
Required:
a. Calculate the company’s current return on investment and residual income.
b. The company is investigating an investment of $400,000 in a project that will generate annual
net operating income of $78,000. What is the return on investment of the project? What is the
residual income of the project? Should the company invest in this project?
117) The following information is available about the Charger Division of Weston Company.
Weston requires a return of 8% from all divisions.
Charger Division Earnings from Operations $ 12,854,000
Charger Division Sales $ 92,500,000
Charger Division Identifiable Assets $ 156,000,000
Required:
a. Compute the ROI for the Charger Division.
b. Compute the residual income for the Charger Division.
118) The following information is available about the status and operations for Division A of
Abad Company, which has a minimum required ROI of 20%. Answer each item independently of
the others.
Division A
Divisional investment $ 100,000
Divisional profit $ 35,000
Divisional sales $ 200,000
Required:
a. Compute the ROI for Division A.
b. Compute the residual income for Division A.
c. Division A could increase its profit by $8,000 by increasing its investment by $30,000.
Compute its total residual income.
d. Division A could increase its profit margin ratio by one percentage point (for example: from
12% to 13%), without increasing total sales or investment. Compute its new ROI.
e. Division A could reduce its investment so that its asset turnover increased by one time, while
holding total sales and profit constant. Compute its new ROI.
119) The following information is available about the status and operations for Division B of
Abad Company, which has a minimum required ROI of 20%. Answer each item independently of
the others.
Division B
Divisional investment $ 750,000
Divisional profit $ 275,000
Divisional sales $ 1,800,000
Required:
a. Compute the ROI for Division B.
b. Compute the residual income for Division B.
c. Division B could increase its profit by $10,000 by increasing its investment by $40,000.
Compute its total residual income.
d. Division B could increase its profit margin ratio by one percentage point (for example: from
10% to 11%), without increasing total sales or investment. Compute its new ROI.
e. Division B could reduce its investment so that its asset turnover increased by one time, while
holding total sales and profit constant. Compute its new ROI.
120) Big Sky Industries is a division of a major corporation. The following data are for the latest
year of operations:
Sales $ 24,900,000
Net operating income $ 1,319,700
Average operating assets $ 6,000,000
The company’s minimum required rate of return 12 %
Required:
a. What is the division’s margin?
b. What is the division’s turnover?
c. What is the division’s return on investment (ROI)?
d. What is the division’s residual income?
121) Big Sky Industries is a division of a major corporation. The following data are for the latest
year of operations:
Sales $ 12,700,000
Net operating income $ 1,054,100
Average operating assets $ 5,000,000
The company’s minimum required rate of return 16 %
Required:
a. What is the division’s return on investment (ROI)?
b. What is the division’s residual income?
122) Raisin Corporation uses residual income to evaluate the performance of its divisions. The
minimum required rate of return for performance evaluation purposes is 19%. The Processed
Foods Division had average operating assets of $410,000 and net operating income of $86,000 in
June.
Required:
What was the Processed Foods Division’s residual income in June?
123) The Parts Division of the Stein Corporation had average operating assets of $150,000 and
net operating income of $27,800 in March. The company uses residual income to evaluate the
performance of its divisions, with a minimum required rate of return of 17%.
Required:
What was the Parts Division’s residual income in March?
124) Edinger Industries is a division of a major corporation. The following data are for the latest
year of operations:
Sales $ 20,760,000
Net operating income $ 2,553,480
Average operating assets $ 6,000,000
The company’s minimum required rate of return 16 %
Required:
What is the division’s residual income?
125) The following information is available about the status and operations for Division A of
Triplex Company, which has a minimum required ROI of 10%. Answer each item independently
of the others.
Division A
Divisional investment $ 100,000
Divisional profit $ 17,500
Divisional sales $ 200,000
Required:
a. Compute the residual income for Division A.
b. Division A could increase its profit by $4,000 by increasing its investment by $30,000.
Compute its new residual income.
c. Division A could increase its profit margin ratio by one percentage point (for example: from
12% to 13%), without increasing total sales or investment. Compute its new residual income.
d. Division A could reduce its investment so that its asset turnover increased by one time, while
holding total sales and profit constant. Compute its new residual income.