Zeldas, a national manufacturer of lawn-mowing and snow-blowing equipment, segments its business according to customer type: Professional and Residential. Assume that the following divisional information was available for the past year (in thousands of dollars): Sales Operating Income Total Assets Residential $ 635,500 $ 63,550 $205,000 Professional $1,031,250 $165,000 $375,000 Management has a 25% target rate of return for each division. Requirements Calculate each division’s ROI. Round all of your answers to four decimal places. Calculate each division’s sales margin. Interpret your results. Calculate each division’s capital turnover. Interpret your results. Use the expanded ROI formula to confirm your results from Requirement 1. What can you conclude? Calculate each division’s residual income (RI). Interpret your results.

From the example, the answer for(1) = The return of investment of residential division is 31% while return on investment of professional division is = 44%  (2)The sales margin for professional division is 16%, while the sales margin for residential division is = 10% (3) The capital turnover of residential division is = 3.10 times and the capital turnover of professional  division is 2.75 times (4) Each residential income for both residential and professional are $12,600 and  $71, 250.

Now,

Explanation:

Solution

Investment return is the ratio which measures the generated profit from an investment. this is done by dividing net incomes with total assets

Given that:

(1)   Calculate each division’s ROI

We calculate the investment on return of residential division where we have an operating costs of $ 63,550 and total assets of $205,000 by applying the formula as shown below.

Now,

ROI = Operating income/Total assets

= $ 63,550/$205,000

= 31%

The return of investment is 31%

We then calculate the investment of returns of professional division where the operating income  is $165000 with a total assets of $375,000 by applying the formula as shown below

Now,

ROI = Operating income/Total assets

= $165000/$375,000

=44%

The return on investment is = 44%

(2) Calculate each division’s sales margin.

Calculate margin of sales of  residential division where the operating income is $62,550 and the sales total is $635,500

Now,

The sales margin = Operating income / sales

=  $62,550/$ 635,500 = 10%

Therefore the sales margin = 10%

Calculate the sales margin of professional division  where the operating income is  $165,000 and the sales total is $1,031,250

sales margin = Operating income/ sales

= $165,000/ $1,031,250 = 16%

The sales margin is 16%

(3) Calculate each division’s capital turnover

We now calculate the  capital turnover of residential division  where the sales are $635,500 and assets of total are also $205,000

Now,

The capital turnover = Sales/Total assets

=$635,500 / $205,000

= 3.10

Thus, the capital turnover is = 3.10 times

We now calculate the  capital turnover of professional division  where total sales are $1,031,250 and assets of total are $375,000 using the formula as shown below.

Capital turnover = Sales/ total assets

=$1,031,250 /  $375,000

= 2.75

The capital turnover is 2.75 times

(4) Calculate the investment of return of residential division using the formula as shown below.

ROI = Sales margin * Capital turnover

=10% * 3.10 = 31%

Thus, the return of investment is 31%

Calculate the investment of return of professional division using the formula as shown below.

ROI = Sales margin * Capital turnover

= 16% * 2.75 = 44%

Thus, the return on investment is = 44%

The next step is to calculate the residential income of residential division using the formula as shown below

Now,

RI = Operating income - (The target rate of return * Total assets)

= $63,550 - ($205,000* 25%) = $12,600

Therefore the residential income is =  $12,600

Now,

calculate the residential income of professional division using the formula as shown below

Now,

RI = Operating income - (The target rate of return * Total assets)

= $165,000 - ($375,000 * 25%)

= $71, 250

Thus, the residential income is $71, 250

Note: Because the residential income in each department is seen as positive, it can be concluded that each departments are working very well.

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