Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows: Division A Division B Division C Sales revenue $ 1,255,000 $ 920,000 $ 898,000 Cost of goods sold 776,000 675,000 652,000 Miscellaneous operating expenses 64,000 52,000 53,100 Interest and taxes 48,000 41,000 41,500 Average invested assets 8,300,000 1,930,000 3,215,000 Wescott is considering an expansion project in the upcoming year that will cost $5 million and return $450,000 per year. The project would be implemented by only one of the three divisions. 2. Compute the residual income for each division. 6. Compute the new ROI and residual income for each division if the project was implemented within that division.
Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows: Division A Division B Division C Sales revenue $ 1,255,000 $ 920,000 $ 898,000 Cost of goods sold 776,000 675,000 652,000 Miscellaneous operating expenses 64,000 52,000 53,100 Interest and taxes 48,000 41,000 41,500 Average invested assets 8,300,000 1,930,000 3,215,000 Wescott is considering an expansion project in the upcoming year that will cost $5 million and return $450,000 per year. The project would be implemented by only one of the three divisions. 2. Compute the residual income for each division. 6. Compute the new ROI and residual income for each division if the project was implemented within that division.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows:
| Division A | Division B | Division C | |
|---|---|---|---|
| Sales revenue | $ 1,255,000 | $ 920,000 | $ 898,000 |
| Cost of goods sold | 776,000 | 675,000 | 652,000 |
| Miscellaneous operating expenses | 64,000 | 52,000 | 53,100 |
| Interest and taxes | 48,000 | 41,000 | 41,500 |
| Average invested assets | 8,300,000 | 1,930,000 | 3,215,000 |
Wescott is considering an expansion project in the upcoming year that will cost $5 million and return $450,000 per year. The project would be implemented by only one of the three divisions.
2. Compute the residual income for each division.
6. Compute the new ROI and residual income for each division if the project was implemented within that division.
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