ACME Incorporated has two independently operating divisions, Division A and Division B. Last year's operating results for
Question:
ACME Incorporated has two independently operating divisions, Division A and Division B. Last year's operating results for Division A are as follows:
Division A | |
Sales | $1,000,000 |
Operating income | 90,000 |
Average total operating assets | 500,000 |
Plant and equipment (net) | 238,000 |
Division B has sales and operating income approximately triple the amount of Division A. Last year Division B had a margin of 10% and turnover of 1.5.
Required:
Calculate the ROI for Division A using margin and turnover.
Using the calculations from Part 1 and information provided, comment on and compare the performance of the two divisions.
Calculate the residual income for Division A assuming the company evaluates performance using 15% as the minimum rate of return for any division.
In comparing the results of Division A and Division B from last year, which performance measure, ROI or Residual Income, is more appropriate? Why?
Cost Management Measuring, Monitoring and Motivating Performance
ISBN: 978-1119185697
3rd Canadian edition
Authors: Leslie G. Eldenburg, Susan K. Wolcott, Liang Hsuan Chen, Gail Cook