Problem - Three divisions of Jameson Co. report the following sales and operating data:
|
|
Fitness Training
|
Spa Services
|
Athletic Wear
|
|
Sales
|
$690,000
|
$890,000
|
$700,000
|
|
Average operating assets
|
$172,500
|
$222,500
|
$140,000
|
|
Operating income
|
$27,600
|
$35,600
|
$35,000
|
|
Minimum required rate of return
|
12%
|
14%
|
12%
|
Required:
1. Compute the ROI for each division, using the formula stated in terms of margin and turnover.
2. Compute the residual income for each division.
3. Assume that each division is presented with an investment opportunity that would yield a rate of return of 19%.
a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity?
b. If performance is being measured by residual incomes, which division or divisions will probably accept the opportunity?