110) Hargrave Products has three divisions, which operate autonomously. Their results for 2014
were as follows:
East West International
Sales $30 000 000 $40 000 000 $50 000 000
Cost of goods sold 15 000 000 25 000 000 37 000 000
Operating profit 4 500 000 4 750 000 5 000 000
Investment base 30 000 000 30 500 000 31 000 000
The company's desired rate of return is 15%.
Required:
a. Compute each division's ROI. Round to three decimal places.
b. Compute each division's residual income.
110)
111) Canberra Asset Management has three divisions. Each division's required rate of return is
15%. Planned operating results for 2014 are as follows:
Division Operating profit Investment
A $22 500 000 $175 000 000
B $37 500 000 $187 500 000
C $16 500 000 $75 000 000
The company is planning an expansion, which will require each division to increase its
investments by $37 500 000 and its profit by $6 750 000.
Required:
a. Calculate the current ROI for each division.
b. Calculate the current residual income for each division.
c. Rank the divisions according to their current ROIs and residual incomes.
d. Determine the effects after adding the new project to each division's ROI and residual
income.
e. Assuming the managers are evaluated on either ROI or residual income, which
divisions are pleased with the expansion and which ones are unhappy?
111)
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