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Computing divisional income and RI and ROI

Eastern Merchants shows the following information for its two divisions for year one.

Eastern Western
Revenue....................................1,200,000 3,800,000
Cost of sales................................769,500 1,900,000
Allocated corporate overhead..... 72,000 228,000
Other general and admin. ...........158,500 1,100,000

The results for year two have been posted:

Eastern Western
Revenue................................ 1,200,000 2,800,000
Cost of sales......................... 769,500 1,400,000
Allocated corporate overhead... 90,000 210,000
Other general and admin. ............158,500 1,100,000

REQUIRED:
Compute divisional operating income for the two divisions for year two. Ignore taxes. How well have these divisions performed?

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TL division of Giant Bank has assets of $14.4 billion. During the past year the division had profits of $1.8 billion. Giant bank has a cost of capital of 8 percent. Ignore taxes.
REQUIRED:
1. Compute the divisional ROI.
2. Compute the divisional RI.

Solution Preview

1. Operating income is income before interest and taxes. We are given the revenue and all costs except interest and taxes.
Operating Income = Revenue - cost of sales - allocated corporate overhead - other general and admin
Eastern, Operating Income = ...

Solution Summary

Computing divisional income, RI and ROI is examined.

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