The Following Information Is Available About the Status and Operations

question 137

Essay

The following information is available about the status and operations for Division B of Abad Company, which has a minimum required ROI of 20%. Answer each item independently of the others.
$$\begin{array} { l r r } & \text { Division B } \\\text { Divisional investment } & \$ 750,000 \\\text { Divisional profit } & \$ 275,000 \\\text { Divisional sales } & \$ 1,800,000\end{array}$$
Required:
a. Compute the ROI for Division B.
b. Compute the residual income for Division B.
c. Division B could increase its profit by $10,000 by increasing its investment by $40,000. Compute its total residual income.
d. Division B could increase its profit margin ratio by one percentage point (for example: from 10% to 11%), without increasing total sales or investment. Compute its new ROI.
e. Division B could reduce its investment so that its asset turnover increased by one time, while holding total sales and profit constant. Compute its new ROI.

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Definitions:

Portfolio

A collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange traded funds (ETFs).

Risky Assets

Financial assets that carry a higher degree of risk of loss, such as stocks, compared to less risky assets like government bonds.

Risk-Free Asset

An investment with zero default risk, typically government bonds, providing a basis for comparing with riskier assets.

Beta

A method for appraising the degree of variation, or consistent peril, of a security or investment pool versus the market at large.