The Water Management Company Has Two Operating Divisions,the Service Division

question 86

Essay

The Water Management Company has two operating divisions,the Service Division and the Irrigation Division.The company evaluates the performance of its divisions using the return on investment (ROI)measure.The following information pertains to the two divisions as of the end of the current year.
$\begin{array}{l}&\text { Service } & \text { Irrigation } & \\&\text { Division } & \text { Division } & \text { Total }\\\text {Units repaired; Units produced}\\\text {and sold}&8,000&250\\\text {Level of investment in operating}\\\text {assets}&\$400,000&\$1,000,000&\$1,400,000\\\\\text { Expenses: }\\\text { Direct materials } & 40,000 & 400,000 & 440,000 \\\text { Direct labor } & 200,000 & 200,000 & 400,000 \\\text { Overhead } & 25,000 & 250,000 & 275,000\\\text { Selling/administrative (S\&A) }\\\text { costs } & \underline{15,000 }& \underline{150,000} & \underline{ 165,000} \\\text { Total expenses } & \underline{ \$ 280,000} & \underline{\$ 1,000,000 }& \underline{ \$ 1,280,000}\end{array}$
The average service fee was $50.00 per unit for the Service Division,while the average selling price of an irrigation system was $5,000 for the Irrigation Division.The company requires a minimum return on investment of 12%.
Required:
Compute the return on investment (ROI)measure for both divisions and the company as a whole.Based on ROI alone,which division had the better performance? (Round ROI measures to the nearest whole percent.)

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