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Computing return on investment and residual income

Please provide a solution in Word doc.

Selected sales and operating data for three division of three different companies are given below:

(Please see the attached file.)

a. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. Show computations.
b. Computer the residual income for each division. Show computations.
c. Under which of these methods would they accept an opportunity with a 15 percent return. Show computations and details.


Solution Preview

Please see the attached Word 97-2003 document.

a. Using the DuPont Method,
Return on investment = Net Operating Margin * Asset Turnover
Return on Investment = Net income/Sales * Sales/Average operating assets
Division X:
Return on investment = $54,000/$900,000 * $900,000/$600,000
Return on investment = .06 * 1.50
Return on investment = .09, or 9 ...

Solution Summary

This solution illustrates how to compute the return on investment using the DuPont Formula and the residual income for a division.