Exercise 3 (ROI, Comparison of Three Divisions)

Consider the following sales and operating data for the three divisions of a conglome

Sales
Operating Income
Operating Assets
Minimum required rate of return

Required (1) Compute the return on investment (ROI) for each division.
Formula: ROI = Net Operating Income
Average Operating Assets

Solution:

For Division X: For Division Y

ROI = ₱ 10,000 ROI =
₱ 40,000

ROI = 25% ROI =

Required (2) Assume that each division is provided with an investment opportunity
Which divisions would accept or reject it?

ROI
Division X 25% Reject
Division Y 18% Accept
Division Z 16% Accept
Exercise 4 (ROI, RI. Comparison of Two Divisions)

Cattleya Company has two divisions, A and B, that operate in similar markets.

Sales
Net Operating Income
Average Operating Assets

Required (1) Compute the ROI for each division.

Solution:
For Division A:
ROI = ₱ 630,000
₱ 3,000,000

ROI = 21%

Required (2) Assume that the company evaluates performance by use of residual incom
Compute the residual income for each division.

Solution:

Operating Income
 Less: Minimum Required Return
Division X (0.16 x P3,000,000)
Division Y (0.16 x P10,000,000)
Residual Income

Required (3) Is Division B's greater residual income an indication that it is better mana

Answer: No, although Division B has greater residual income, because of its larger asse
it will almost look better, not necessarily because of better management but
ree divisions of a conglomerate:

Division X Division Y Division Z

₱ 280,000 ₱ 360,000 ₱ 500,000
₱ 10,000 ₱ 12,600 ₱ 28,800
₱ 40,000 ₱ 70,000 ₱ 180,000
10% 19% 20%

ach division.
ng Income
ating Assets

For Division Z
₱ 12,600 ROI = ₱ 28,800
₱ 70,000 ₱ 180,000

18% ROI = 16%

an investment opportunity that could produce 20 percent return on ivestment.

operate in similar markets. Selected data on the two divisions follow:

Division
A B
₱ 9,000,000 ₱ 20,000,000
630,000 1,800,000
3,000,000 10,000,000

For Division B:
ROI = ₱ 1,800,000
₱ 10,000,000

ROI = 18%

nce by use of residual income and that the minimum required return for any division is 16 perc

Division A Division B
₱ 630,000 ₱ 1,800,000
 480,000
1,600,000
₱ 150,000 ₱ 200,000

ation that it is better managed?

me, because of its larger asset base which produces higher revenues,
of better management but because of the larger figures involved.
y division is 16 percent.