Care Inc., has two divisions that operate independently of one another. The fina
ID: 2589754 • Letter: C
Question
Care Inc., has two divisions that operate independently of one another. The financial data for the year 2015 reported the following results:
North
South
Sales
$6,000,000
$5,000,000
Operating income
1 comma 900 comma 0001,900,000
1 comma 700 comma 0001,700,000
Taxable income
1 comma 800 comma 0001,800,000
850 comma 000850,000
Investment
18 comma 000 comma 00018,000,000
11 comma 000 comma 00011,000,000
The company's desired rate of return is 10%. Income is defined as operating income. Which division has the best return on investment and which division has the best residual income figure, respectively?
North
South
Sales
$6,000,000
$5,000,000
Operating income
1 comma 900 comma 0001,900,000
1 comma 700 comma 0001,700,000
Taxable income
1 comma 800 comma 0001,800,000
850 comma 000850,000
Investment
18 comma 000 comma 00018,000,000
11 comma 000 comma 00011,000,000
Explanation / Answer
Retrun on Investment (ROI) = (Operating income / Investment) * 100
For North = ($1,900,000 / $18,000,000) *100 = 10.55 %
ForSouth = ($1,700,000 / $11,000,000) *100 = 15.45 %
Conclusion : ROI of South is best
Residual income = Operating income - (Investment *desired rate of return)
For North = $1,900,000 - ($18,000,000 * 10 %) = $100,000
ForSouth = $1,700,000 - ($11,000,000 * 10 %) = $600,000
Conclusion : Residual income of South is best