Question

PA10-3 Evaluating Managerial Performance, Proposed Project Impact on Return on Investment, Residual Income [LO 10-4, 10-5]. Wescott Company has three divisions: A, B, and C. The company has a hurdle rate of 8 percent. Selected operating data for the three divisions are as follows:

Division A Division B Division C
Sales revenue $ 1,255,000 $ 920,000 $ 898,000
Cost of goods sold 776,000 675,000 652,000
Miscellaneous operating expenses 64,000 52,000 53,100
Interest and taxes 48,000 41,000 41,500
Average invested assets 8,300,000 1,930,000 3,215,000. Wescott is considering an expansion project in the upcoming year that will cost $5 million and return $450,000 per year. The project would be implemented by only one of the three divisions.
Required:
1. Compute the ROI for each division. (Do not round your intermediate calculations.)
2. Compute the residual income for each division. (Loss amounts should be indicated by a minus sign.)
3.Rank the divisions according to the ROI and residual income of each.
4-a. Compute the return on the proposed expansion project.
4-b. Is this an acceptable project? No Yes
5.Without any additional calculations, state whether the proposed project would increase or decrease each division’s ROI and state whether the division manager would accept or reject the proposed project.
6. Compute the new ROI and residual income for each division if the project was implemented within that division. (Loss amounts should be indicated by a minus sign. Do not round your intermediate calculations. Round "ROI" answers to 2 decimal places.

Answer 1

Managerial performance can be evaluated using ROI and residual income, which help in ranking the divisions of a company and in making decisions about potential expansion projects. The return on the expansion project and its impact on each division's financial metrics are critical for such decisions.

Step-by-step explanation:

Evaluating managerial performance through financial metrics such as Return on Investment (ROI) and residual income is crucial for understanding the efficiency and profitability of different divisions within a company. The ROI for each division is calculated by dividing the net operating income by the average invested assets. Residual income is found by subtracting the product of the hurdle rate and the average invested assets from the net operating income. With these calculations, divisions can be ranked accordingly.

To address the proposed expansion project, the return on the proposed expansion project would also be calculated, considering the cost of the project and the anticipated annual return. Whether this project is acceptable would depend on whether the return meets or exceeds the company's hurdle rate. The project's impact on each division's ROI and residual income can influence a division manager's decision to accept or reject the project, given that managers typically seek to improve or at least maintain their current performance metrics.

If the project were to be implemented within a division, the new ROI and residual income should be calculated to assess the impact. These calculations involve modifying the previous divisional figures to include the effect of the project's cost and returns.