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CH12 Solutions - 1 Turnover=Sales/AvgOperatingAssets...

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Chapter 12 Review Exercises 1. Northewest Region Southwest Region Turnover = Sales/ Avg Operating Assets $18,000,000 /6,000,000 = 3 $9,000,000 /6,000,000 = 1.5 Margin = Operating Income / Sales $540,000 / 18,000,000 = 3% $900,000 / 9,000,000 = 10% ROI = Operating Income / Avg Opr Assets $540,000 / 6,000,000 = 9% $900,000 / 6,000,000 = 15% or Turnover x Margin 3 x .03 = 9% 3 x .03 = 9% Residual Income = Operating Income - (Minimum Rate of Return x Avg Opr Assets) Operating Income $540,000  $900,000  Minimum Rate of Return x Avg Opr Assets  600,000   600,000  Residual Income ($60,000) $300,000  2.  The NW Region has a negative residual income because its ROI, which is 9%, is less than the 10% hurdle rate;         1% of %6,000,000 = $(60,000) The SW Region has a positive residual income because its ROI,which is 15%, is higher that the 10% hurdle rate;         5% of %6,000,000 = $300,000 3. Southwest Region ROI = Operating Income / Avg Opr Assets $900,000 / 6,000,000 = 15% Before Project ROI = Operating Income / Avg Opr Assets $220,000 / 2,000,000 = 11%
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