Accounting: What the Numbers Mean
11th Edition
ISBN: 9781259535314
Author: David Marshall, Wayne William McManus, Daniel Viele
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 15, Problem 15.17E
Exercise 15.17
LO 9
Investment center analysis;
Required:
- Using the DuPont model, calculate The Central Division’s margin, turnover, and ROI.
- Calculate The Central Division’s residual income.
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QUESTION 2
Ayittey Ltd is an organization with two divisions: A and B, each with its own cost and revenue streams. Each of the two divisions is classified as Investment center. The company’s cost of capital is 9%. Historically, investment decisions have been made by calculating the return on investment (ROI). A new manager who has recently been appointed in division A has argued that using residual income (RI) to make investment decisions would result in ‘better goal congruence’ throughout the company.
The data below shows the current position of the division as at the end of 31 December, 2019:
Details of Projects Project A Project B
Capital required GH¢ 82.8 million GH¢ 40.6 million
Sales generated GH¢44.6 million GH¢ 21.8 million
Net Profit margin 18% 25%
The company is seeking to maximize shareholders wealth. Assuming that, Division A acquires a more efficient asset at GH¢17 million and Division B sold one of its assets with written down value of GH¢21 million, and profits are…
Chapter 10 Homework
10
Sales
Average operating assets
Net operating income
Minimum required rate of return
Selected sales and operating data for three divisions of different structural engineering firms are given as follows:
Division B
$ 14,700,000
$ 7,350,000
$588,000
Division C
$26,250,000
$ 5,250,000
$ 840,000
16%
Req 1
Reg 2
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.
3. Assume that each division is presented with an investment opportunity that would yield a 15% rate of return.
a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?
b. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity
Residual income (loss)
Check my work mode: This shows what is correct or incorrect for the work you have co
Complete this…
Exercise 25.11 (Static) Using ROI and EVA for Performance Evaluation (LO25-2, LO25-3, LO25-4)
Easton's Fabric Division has assets of $980,000, current liabilities of $130,000, and net operating income of $196,000.
a. What is the Fabric Division's ROI?
b. If the weighted-average cost of capital is 15 percent, what is the division's EVA?
c. Which is the better technique to measure performance?
Complete this question by entering your answers in the tabs below.
Required A
Required B
Required C
What is the Fabric Division's ROI?
ROI
RecuiccA
Required B >
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Chapter 15 Solutions
Accounting: What the Numbers Mean
Ch. 15 - Prob. 15.1MECh. 15 - Prob. 15.2MECh. 15 - Prob. 15.3MECh. 15 - Prob. 15.4MECh. 15 - Mini-Exercise 15.5 LO 4, 5, 6 Variable overhead...Ch. 15 - Mini-Exercise 15.6
LO 4. 5, 6
Fixed overhead...Ch. 15 - Prob. 15.7ECh. 15 - Prob. 15.8ECh. 15 - Prob. 15.9ECh. 15 - Prob. 15.10E
Ch. 15 - Prob. 15.11ECh. 15 - Prob. 15.12ECh. 15 - Exercise 15.13 LO 4. 5 Direct material...Ch. 15 - Exercise 15.14 LO 4, 5 Direct material...Ch. 15 - Prob. 15.15ECh. 15 - Prob. 15.16ECh. 15 - Exercise 15.17 LO 9 Investment center analysis;...Ch. 15 - Prob. 15.18ECh. 15 - Problem 15.19 LO 4. 5 Calculate variable cost...Ch. 15 - Problem 15.20 LO 4. 5 Calculate variable cost...Ch. 15 - Problem 15.21 LO 4, 5 Direct labor...Ch. 15 - Problem 15.22 LO 4, 5 Direct labor...Ch. 15 - Problem 15.23 LO 5, 6 Fixed overhead...Ch. 15 - Case 15.25 LO 3 Performance reporting The chair of...Ch. 15 - Case 15.26 LO 3 Flexible budgeting One of the...Ch. 15 - Case 15.27 LO 4 Frequency of performance reporting...Ch. 15 - Case 15.28 LO 5 Rank the importance of eight...Ch. 15 - Case 15.29 LO 4. 5 Direct material variances-the...Ch. 15 - Case 15.30 LO 5 Evaluate the effects of erroneous...Ch. 15 - Prob. 15.31CCh. 15 - Case 15.32 The planning and control environment:...
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- QUESTION 28 Top management is trying to determine which would be the best choice of the following investment opportunities: Data of investment choices: 2 Sales $9,000,000 Operating income 300,000 Average operating assets 3,000,000 Required: Compute the Residual Income assuming a minimum required rate of return of 8%. $66,000 $60,000 $50,000 $55,000arrow_forwardQUESTION 31 Top management is trying to determine which would be the best choice of the following investment opportunities: Data of investment choices: 1 2 3 Sales $10,000,000 $9,000,000 $6,000,000 Operating income 200,000 300,000 300,000 Average operating assets 2,000,000 3,000,000 3,000,000 Minimum required rate of return = 8% Evaluate the three investment choices: Each investment choice has the same ROI, 10 percent. Choices 2 & 4 have a higher residual income then Choice 1, but that is to be expected given that they appear to be larger. Because residual income is an absolute measure, it should not be used to compare investment centers of different size. In general, larger investment centers should have larger residual incomes. Each investment choice has a different ROI. Choices 2 & 3 have a higher residual income then Choice 1, but that is to be expected given that…arrow_forwardExercise 14-29 (Algo) Compute RI and ROI (LO 14-2, 3) The Custodial Division of Clark's Corporate Services (CCS) has assets of $1.2 million. During the past year, the division had profits of $240,000. CCS has a cost of capital of 7.5 percent. Ignore taxes. Required: a. Compute the divisional ROI for the Custodial Division. b. Compute the divisional RI for the Custodial Division. Complete this question by entering your answers in the tabs below. Required A Required B Compute the divisional ROI for the Custodial Division. Divisional ROI %arrow_forward
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