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Exercise 11-1 (10 minutes)

|1. |[pic] |

|2. |[pic] |

|3. |[pic] | Exercise 11-2 (10 minutes)

|Average operating assets |£2,200,000 | |Net operating income |£400,000 | |Minimum required return: | 352,000 | |16% × £2,200,000 | | |Residual income |£ 48,000 |

Exercise 11-6 (15 minutes)

|1. |[pic] |

|2. |[pic] | Exercise 11-6 (continued)

|3. |[pic] | Exercise 11-7 (20 minutes)

1.ROI computations:

[pic]

Perth:[pic]

Darwin:[pic]

| 2. | |Perth |Darwin | | |Average operating assets |$3,000,000 |$10,000,000 | | |Net operating income |$630,000 |$1,800,000 | | |Minimum required return on average operating assets—16% × Average | 480,000 | 1,600,000 | | |operating assets | | | | |Residual income |$150,000 |$  200,000 | | | | | |

3.No, the Darwin Division is simply larger than the Perth Division and for this reason one would expect that it would have a greater amount of residual income. Residual income can’t be used to compare the performance of divisions of different sizes. Larger divisions will almost always look better. In fact, in the case above, Darwin does not appear to be as well managed as Perth. Note from Part (1) that Darwin has only an 18% ROI as compared to 21% for Perth.

Exercise 11-8 (15 minutes)

| |Company A | |Company B | |Company C | |Sales |$400,000 |* | |$750,000 |* | |$600,000 |* | |Net operating income |$32,000 | | |$45,000 |* | |$24,000 | | |Average operating assets |$160,000 |* | |$250,000 | | |$150,000 |* | |Return on investment (ROI) |20% |* | |18% |* | |16% | | |Minimum required rate of return: | | | |...
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