EBK ACCOUNTING PRINCIPLES
13th Edition
ISBN: 9781119411017
Author: Weygandt
Publisher: WILEY
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Chapter 25, Problem 20E
a
To determine
Introduction:
To calculate : The ROI.
b
To determine
Introduction:
The management determines residual income to evaluate the return to be received from a particular investment after deducting variable and fixed costs from the revenue generated from the operations.
To calculate: The residual income.
c
To determine
Introduction:
ROI determines the percentage of return incurred by performing the operations. It helps the investor in evaluating the profitability with respect to opportunity investments.
: The analysis of ROI and residual income.
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Required:
1. Compute the ROI for each division.
2. Assume that the company evaluates performance by use of residual income and that the minimum required return for any division is 16 degrees. Compute the residual income for each division.
Selected sales and operating data for three divisions of different structural engineering firms are given as follows:
2. Compute the residual income (loss) for each division.
3. Assume that each division is presented with an investment opportunity that would yield a 7% 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?
Division A
Division B
Division C
Sales
$
15,950,000
$
28,760,000
$
25,950,000
Average operating assets
$
3,190,000
$
7,190,000
$
5,190,000
Net operating income
$
733,700
$
373,880
$
752,550
Minimum required rate of return
6.00
%
6.50
%
14.50
%
Required:
1. Compute the ROI for each division.
2. Assume that the company evaluates performance by use of residual income and that the minimum required return for any division is 16%. Compute the residual income for each division.
Chapter 25 Solutions
EBK ACCOUNTING PRINCIPLES
Ch. 25 - Prob. 1QCh. 25 - Prob. 2QCh. 25 - Prob. 3QCh. 25 - 4. Ken Bay questions the usefulness of a master...Ch. 25 - Prob. 5QCh. 25 - Prob. 6QCh. 25 - Prob. 7QCh. 25 - Prob. 8QCh. 25 - Prob. 9QCh. 25 - Prob. 10Q
Ch. 25 - Prob. 11QCh. 25 - Prob. 12QCh. 25 - Prob. 13QCh. 25 - Prob. 14QCh. 25 - Prob. 15QCh. 25 - Prob. 16QCh. 25 - Prob. 17QCh. 25 - Prob. 18QCh. 25 - Prob. 19QCh. 25 - Prob. 20QCh. 25 - Prob. 21QCh. 25 - Prob. 22QCh. 25 - Prob. 23QCh. 25 - Prob. 24QCh. 25 - Prob. 25QCh. 25 - Prob. 26QCh. 25 - Prob. 1BECh. 25 - Prob. 2BECh. 25 - Prob. 3BECh. 25 - Prob. 4BECh. 25 - Prob. 5BECh. 25 - Prob. 6BECh. 25 - (LO 3) Torres Company accumulates the following...Ch. 25 - Prob. 8BECh. 25 - Prob. 9BECh. 25 - Prob. 10BECh. 25 - Prob. 11BECh. 25 - Prob. 12BECh. 25 - Prob. 1DIECh. 25 - Prob. 2DIECh. 25 - Prob. 3DIECh. 25 - Prob. 4DIECh. 25 - Prob. 1ECh. 25 - E24-2 Crede Company budgeted selling expenses of...Ch. 25 - Prob. 3ECh. 25 - Prob. 4ECh. 25 - Prob. 5ECh. 25 - Prob. 6ECh. 25 - Prob. 7ECh. 25 - Prob. 8ECh. 25 - Prob. 9ECh. 25 - Prob. 10ECh. 25 - Prob. 11ECh. 25 - Prob. 12ECh. 25 - Prob. 13ECh. 25 - Prob. 14ECh. 25 - Prob. 15ECh. 25 - Prob. 16ECh. 25 - Prob. 17ECh. 25 - Prob. 18ECh. 25 - Prob. 19ECh. 25 - Prob. 20ECh. 25 - Prob. 21ECh. 25 - Prob. 1PSACh. 25 - (LO 2) Zelmer Company manufactures tablecloths....Ch. 25 - Prob. 3PSACh. 25 - Prob. 4PSACh. 25 - Prob. 5PSACh. 25 - Prob. 6PSACh. 25 - Prob. 7PSACh. 25 - Service Green Pastures is a 400-acre farm on the...Ch. 25 - Prob. 2EYCTCh. 25 - Prob. 3EYCTCh. 25 - Prob. 4EYCTCh. 25 - Prob. 5EYCTCh. 25 - Prob. 7EYCT
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- The vice president of operations of Moab Bike Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year ending October 31, 20Y9, for each division are as follows: (P14-5) Touring Bike Division Trail Bike Division Sales $1,500,000 $5,00 Cost of goods sold Operating expenses Invested assets 900,000 4,000,000 495,000 968,000 750,000 3,600,000 Instructions 1. Prepare condensed divisional income statements for the year ended October 31, 20Y9, assuming that there were no service department charges. Touting Bike Division Trial Bike Divisionarrow_forwardPlease see picture for the full problem and table. a-1. Evaluate the performance of the two divisions assuming BMI uses return on investment (ROI). (Round your final answers to nearest whole percentage value.)arrow_forwardImage attached below. Questions 1. Compute the current ROI for each division. 2. Compute the current residual income for each division. 3. Determine the effects after adding the new project to each division's ROI and residual income. 4. Explain how the manager of each division will react to the opportunity if their performance is evaluated against residual income. 5. Explain how the manager of each division will react to the opportunity if their performance is evaluated against ROI. 6. Are ROI and residual income appropriate for evaluating the performance if the divisional managers 7. What additional measures could be used for performance evaluation.arrow_forward
- 1. For each division, compute the return on investment (ROI) in terms of margin and turnover. 2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 12%. Compute the residual income for each division. 3. Is Yokohama's greater amount of residual income an indication that it is better managed?arrow_forwardTan Corporation of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow: Sales Net operating income Average operating assets Required 1 Required 2 Required: 1. For each division, compute the return on investment (ROI). 2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 17%. Compute the residual income for each division. Complete this question by entering your answers in the tabs below. ROI Osaka $ 10,100,000 $ 808,000 $ 2,525,000 Osaka Division For each division, compute the return on investment (ROI). % Yokohama $ 31,000,000 $ 3,100,000 $ 15,500,000 Yokohama %arrow_forwardTan Corporation of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow: Sales Net operating income Average operating assets Required 1 Required 2 Required: 1. For each division, compute the return on investment (ROI). 2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 18%. Compute the residual income for each division. Complete this question by entering your answers in the tabs below. ROI Osaka $ 9,400,000 $ 752,000 $ 2,350,000 Osaka Division For each division, compute the return on investment (ROI). % Yokohama $ 24,000,000 $ 2,400,000 $8,000,000 Yokohama %arrow_forward
- Comparison of Performance Using Return on Investment (ROI) Comparative data on three companies in the same service industry are given below: Required: 1. What advantages are there to breaking down the ROI computation into two separate elements, margin and turnover? 2. Fill in the missing information above, and comment on the relative performance of the three companies in as much detail as the data permit. Makearrow_forwardWhich of the following statements is true? Suppose a company evaluates divisional performance using both ROI and residual income. The company's minimum required rate of return for the purposes of residual income calculations is 12%. If a division has a residual income of $6,000, then its ROI is less than 12%. If a company contains a number of investment centers of differing sizes, return on investment (ROI) should be used rather than residual income to rank the financial performance of the divisions. ROI and residual income are tools used to evaluate managerial performance in investment centers.arrow_forwardA-1. Evaluate the performance of the two divisions assuming BMI users return on investment (ROI). A-2. Which division had the better performance?arrow_forward
- Select all of the formulas below that will correctly get you the Return on Investment. Operating Income / Total Assets Sales Margin * Capital Turnover (Operating Income / Sales Revenue) (Sales Revenue / Total Assets) Operating Income - (Target Rate of Return * Total Assets) -DO Which of the following promotes goal congruence (aligned goals between segment managers and top management)? Return on Investment as a performance evaluation measure Residual Income as a performance evaluation measurearrow_forwardReturn on investment is often expressed as follows: d. Requirements 1. What are the advantages of breaking down the computation into two separate components? 2. Fill in the blanks for the following table: Revenues Income Investment Income as a percentage of revenues Investment turnover ROI Requirement 2. Fill in the blanks for the following table: (Enter investment turnover to the nearest tenth, X.X.) Companies in Same Industry B Income and investment alone shed investment or to its A 1,400,000 $ 210,000 $ 700,000 % Company B does % income. 1,100,000 165,000 % Income Income Revenues Investment Revenues Investment 3% C Now comment on the relative performance of these companies as thoroughly as the data permit. light on comparative performances. Thus, we Company B should emphasize increasing investment turnover by reducing percentage of revenues by increasing only its 5,500,000 1.5% 2.0 = % Company A in terms of income margin. Company B has a Company A's. Company C's income as a…arrow_forwardSelect the best answer from the five listed below to fill in the blank The residual income approach to measuring divisional performance measurement is closely related to the method of performance measurement. O a. payback period O b. economic value added O c. return on capital employed O d. internal rate of return O e. accounting rate of returnarrow_forward
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Introduction to Divisional performance measurement - ACCA Performance Management (PM); Author: OpenTuition;https://www.youtube.com/watch?v=pk8Mzoqr4VA;License: Standard Youtube License