Question

Rogers​, a national manufacturer of​ lawn-mowing and​ snow-blowing equipment, segments its business according to customer​ type: Professional and Residential. Assume the following divisional information was available for the past year​ (in thousands of​ dollars):

Sales Operating Income Total Assets
Residential $850,000 $68,000 $200,000
Professional $1,095,000 $153,300 $365,000

Assume that management has a 25% target rate of return for each division.

Requirements
a. Calculate each division’s ROI.
b. Calculate each division’s sales margin. Interpret your results.
c. Calculate each division’s capital turnover. Interpret your results.
d. Use the expanded ROI formula to confirm your results from Requirement a. What can you conclude?
e. Calculate each division’s residual income (RI). Interpret your results.

Answer 1

A.Residential 34%

Professional 42%

B.Residential 8%

Professional 14%

C.Residential 4.25%

Professional 3%

D.Residential 34%

Professional 42%

E.Residential $18,000.00

Professional $62,050.00

Step-by-step explanation:

A.Calculation for each division’s ROI

Using this formula

Return on Investment

=Net Income / Average Invested Assets

Let plug in the formula

Residential $68,000.00/$200,000.00 = 34.00%

Professional $153,300.00/$365,000.00 = 42.00%

B.Calculation for each division’s sales margin. Interpret your results

Using this formula

Sales Margin= Operating income/Sales

Let plug in the formula

Residential $68,000.00/$850,000.00 = 8.00%

Professional $153,300.00/$1,095,000.00 = 14.00%

C.Calculation for each division’s capital turnover

Using this formula

Capital Turnover=Sales/Average operating assets

Let plug in the formula

Residential $850,000.00 /$200,000.00 = 4.25

Professional $1,095,000.00/$365,000.00 = 3.00

D.Using the expanded ROI formula to confirm the results from Requirement a.

Using this formula

Return on Investment=Profit Margin * Investment Turnover

Let plug in the formula

Residential 8.00% * 4.25% 34.0%

Professional 14.00% * 3.00% 42.0%

E.Calculation for each division’s residual income (RI)

Residential Professional

Average investment

$200,000.00 $365,000.00

×Target return 25% 25%

=Target income

$50,000.00 $91,250.00

Hence,

Operating income $68,000.00 $153,300.00

Less:Target income$50,000.00 $91,250.00

Residual income $18,000.00 $62,050.00