Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

Required:

1.         Compute the return on investment (ROT) for each division using the formula stated in terms of margin and turnoven.

2.         Compute the residual income 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 ROT, which division or divisions will probably accept the opportunity? Reject? Why?

(b)        If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject? Why?

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Division A Division B Division C Sales S12,000,000 S14,000,000 $25,000,000 Average operating assets S3,000,000 $7,000,000 $5,000,000 Net operating income. S600,000 $560,000 S800,000 Minimum required rate to 10% 14% 16% retum