Chapter 11 Selected Problems

Chapter 11 Selected Problems - Exercise117(20minutes 1...

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Exercise 11-7  (20 minutes) 1. ROI computations: Perth: Darwin: 2. Perth Darwin Average operating assets .................... \$3,000,000 \$10,000,000 Net operating income ........................... \$630,000 \$1,800,000 Minimum required return on average  operating assets—16%  ×  Average  operating assets ................................   480,000       1,600,000     Residual income .................................. \$150,000 \$        200,000     3. No, the Darwin Division is simply larger than the Perth Division and for  this reason one would expect that it would have a greater amount of  residual income. Residual income can’t be used to compare the  performance of divisions of different sizes. Larger divisions will almost  always look better. In fact, in the case above, Darwin does not appear to  be as well managed as Perth. Note from Part (1) that Darwin has only  an 18% ROI as compared to 21% for Perth. Exercise 11-8  (15 minutes) Comp any A Comp any B Company C Sales ............................................ \$400,000 * \$750,000 * \$600,000 * Net operating income .................. \$32,000 \$45,000 * \$24,000 Average operating assets ............ \$160,000 * \$250,000 \$150,000 * Return on investment (ROI) ......... 20% * 18% * 16% Minimum required rate of return: Percentage ............................... 15% * 20% 12% * Dollar amount ........................... \$24,000 \$50,000 * \$18,000 Residual income .......................... \$8,000 \$(5,000) \$6,000 *

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*Given. Exercise 11-9  (30 minutes) 1. Computation of ROI. Division A:   Division B:   Division C:   2. Division A Division B Division C Average operating assets .... \$1,500,000 \$5,000,000 \$2,000,000 Required rate of return ......... ×                15%     ×                18%     ×                12%     Minimum required return ...... \$        225,000     \$        900,000     \$        240,000     Actual net operating income \$  300,000 \$  900,000 \$  180,000 Minimum required return  (above) ..............................       225,000           900,000             240,000     Residual income .................. \$          75,000     \$                          0    \$          (60,000     ) Exercise 11-9  (continued) 3. a. and b.
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