Big Sky Industries Is a Division of a Major Corporation

question 120

Essay

Big Sky Industries is a division of a major corporation. The following data are for the latest year of operations:
$$\begin{array} { l r } \text { Sales } & \$ 12,700,000 \\\text { Net operating income } & \$ 1,054,100 \\\text { Average operating assets } & \$ 5,000,000\\\text { The company's minimum required rate of return }&16\%\end{array}$$

Required:
a. What is the division's return on investment (ROI)?
b. What is the division's residual income?

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Definitions:

Market Price

The current price at which a good or service can be bought or sold in a market, determined by the forces of supply and demand.

Sacks

Bags made of various materials, typically used for storing or transporting items.

Profit Maximized

The point at which a firm's profit is at its highest because marginal cost equals marginal revenue.

Total Cost

The complete cost of production, including both fixed costs that do not change regardless of the output level and variable costs that increase or decrease with the level of production.