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Orange Corp. has two divisions: Fruit and Flower. The following information for the past year is available for each division: Fruit Division Flower Division Sales revenue $ 1,740,000 $ 2,610,000 Cost of goods sold and operating expenses 1,392,000 1,957,500 Net operating income $ 348,000 $ 652,500 Average invested assets $ 3,480,000 $ 2,718,750 Orange has established a hurdle rate of 6 percent. Required: 1-a. Compute each division’s return on investment (ROI) and residual income for last year. 1-b. Determine which manager seems to be performing better. 2. Suppose Orange is investing in new technology that will increase each division’s operating income by $131,000. The total investment required is $2,200,000, which will be split evenly between the two divisions. Calculate the ROI and residual income for each division after the investment is made. 3. Determine whether both managers will support the investment.

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Answer:

FRUIT DIVISION :

ROI = 10%

RESIDUAL INCOME = 139,200

FLOWER DIVISION :

ROI = 24%

RESIDUAL INCOME = 489,375

FLOWER DIVISION seems to be performing better

B.) FRUIT DIVISION :

ROI = 10. 46%

RESIDUAL INCOME = 204,200

FLOWER DIVISION :

ROI = 20.52%

RESIDUAL INCOME = 554,375

Manager of fruit division will accept

Manager of flower division won't accept

Explanation:

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Answer:

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Explanation:

                                                                  Fruit Division Flower Division

Sales revenue                                                $ 1,740,000 $ 2,610,000

Cost of goods sold and operating expenses 1,392,000 1,957,500

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Net operating income                                     $ 348,000 $ 652,500

Average invested assets                              $ 3,480,000 $ 2,718,750

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Part 1a.

ROI Fruit Division = 348,000/3,480,000 = 10%

ROI Flower Division = 652,500/2,718,750 = 24%

Residual Income Fruit Division = 348,000 - (3,480,000 * 0.06) = 139,200

Residual Income Flower Division = 652,500 - (2,718,750 * 0.06) = 489.375

Part 1b.

ROI Flower Division > ROI Fruit Division and Residual Income Flower Division > Residual Income Fruit Division,

in consequence Flower Division's manager is performing better.

Part 2.

ROI Fruit Division = 479,000/4,580,000 = 10.5% (Rounding to the next tenth)

ROI Flower Division = 783,500/3,818,750 = 20.5% (Rounding to the next tenth)

Residual Income Fruit Division = 479,000 - (4,580,000 * 0.06) = 204,200

Residual Income Flower Division = 783,500 - (3,818,750 * 0.06) = 554.375

Part 3.

Flower Division: Manager will support the investment because the division will have a higher ROI and Residual Income

Fruit Division: Manager will also support the investment because the division will have a higher Residual Income, despite the fact the ROI will decrease temporarily 3.5%. The division will perform better in the upcoming years after the investment is made.

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