The following is partial information for Xavier Company’s most recent year of operation. Xavier manufactures children’s shoes and categorizes its operations into two divisions, Girls and Boys.

Required:
1. Without making any calculations, determine whether each division’s return on investment is above or below Xavier’s hurdle rate. How can you tell?

2. Determine the missing amounts in the preceding table.

3. What is Xavier’s hurdle rate?

4. Suppose Xavier has the opportunity to invest additional assets to help expand the company’s market share. The expansion would require an investment of \($4\) million and would generate \($800,000\) in additional income. From Xavier’s perspective, is this a viable investment? Why or why not?

5. Suppose the two divisions would equally share the investment and profits from the expansion project. If return on investment is used to evaluate performance, what will each division think about the proposed project?

6. In requirement 5, will either manager’s preference change if residual income is used to measure division performance? Explain your answer.

Sales revenue Average invested assets Operating income Profit margin Investment turnover Return on investment Residual income Girls Division $2,000,000 ? $ 500,000 ? 1.0 ? Boys Division ? $1,000,000 $ 300,000 15% ? ? $ 260,000 $ 180,000