126) The following information is available about the status and operations for Division B of
Tallon 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 residual income for Division B.
b. Division B could increase its profit by $25,000 by increasing its investment by $100,000.
Compute its new residual income.
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 residual income.
(Round immediate calculations to three decimal places.)
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 residual income.
127) The Augment Manufacturing 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 $ 12,000
Net operating income 188,600 115,600 76,000
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 %
Required:
a. What is the ROI for each of the three divisions?
b. What is the cost of capital for each of the three divisions?
128) The Butyl Division of the Swiss Corporation just started operations. It purchased
depreciable assets costing $2,500,000 with an expected life of five years, after which the assets
can be salvaged for $400,000. Depreciation is computed for the financial statements on a
straight-line basis, using the salvage value. Annual operating cash flows are $1,300,000.
Required:
a. Compute the division’s return on investment (ROI) for each year, using beginning of the year
asset values, historical costs, and net book values.
b. Compute the division’s return on investment (ROI) for each year, using end of the year asset
values, historical costs, and net book values.
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129) The Butyl Division of the Swiss Corporation just started operations. It purchased
depreciable assets costing $2,500,000 with an expected life of five years, after which the assets
can be salvaged for $400,000. Depreciation is computed for the financial statements on a
straight-line basis, using the salvage value. Annual operating cash flows are $1,300,000 for year
1. Assume that all cash flows and asset prices increase by 12.5% per year.
Required:
a. Compute the division’s ROI for the first three years, using end of the year asset values, current
costs, and net book values.
b. Compute the division’s ROI for the first three years, using end of the year asset values, current
costs, and gross book values.
130) Three years ago, one division of the Calsone Enterprise Company purchased depreciable
assets costing $2,000,000. The cash flows from these assets for the past three years have been:
Year Cash flows
1 $ 600,000
2 700,000
3 810,000
Calsone uses the straight-line depreciation method and the assets had an estimated useful life of
10 years with no salvage value. For return on investment (ROI) calculations, Calsone uses end-
of-year balances.
Required:
a. What was the ROI for each year using historical cost and gross book value?
b. What was the ROI for each year using historical cost and net book value?
131) Explain the difference between the gross margin ratio, the operating margin ratio, and the
profit margin ratio.
132) What are two disadvantages of using divisional income as a performance measure?
133) Describe the two main limitations of return on investment.
134) How does the use of residual income overcome the limitations of using return on
investment?
135) How does EVA differ from residual income?
136) “I think that EVA is the best performance measure. I am going to recommend that we
evaluate managers at all levels, including the chief executive officer (CEO), using it.” Do you
think this statement is appropriate? Explain.
137) Explain how using gross book value to measure the assets gives different results than using
net book value. What happens to ROI over time under each of the two measures?
138) What is the problem with choosing a beginning, ending or average balance when measuring
the investment base for performance evaluation?
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139) Financial data for Windsor, Inc. for last year appear below:
The company paid dividends of $104,000 last year. The “Investment in Pine Company” on the
statement of financial position represents an investment in the stock of another company.
Required:
a. Compute the company’s margin, turnover, and return on investment for last year.
b. The Board of Directors of Windsor, Inc. has set a minimum required return of 25%. What was
the company’s residual income last year?
