Capital Investments Has Three Divisions

question 140

Essay

Capital Investments has three divisions. Each division's required rate of return is 15%. Planned operating results for 2015 are as follows:

The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its income by $4,500,000.
Required:
a.Compute the current ROI for each division.
b.Compute the current residual income for each division.
c.Rank the divisions according to their current ROIs and residual incomes.
d.Determine the effects after adding the new project to each division's ROI and residual income.
e.Assuming the managers are evaluated on either ROI or residual income, which divisions are pleased with the expansion and which ones are unhappy?

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Definitions:

Sales Mix

refers to the composition of different products or services sold, impacting overall sales and profitability.

Fixed Expenses

These are expenses that remain constant regardless of the amount of goods produced or sold, including items like rent, wages, and insurance premiums.

Selling Price

The amount of money for which a product or service is sold to customers.

Variable Labor Cost

Costs for labor that change in proportion to the level of production or sales in a company.