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A food manufacturer reports the following for two of its divisions for a recent year.
($ millions) Beverage Division Cheese Division
Invested assets, beginning $2,680 $4,473
Invested assets, ending 2,602 4,409
Sales 2,690 3,934
Operating income 358 643
Required:
1. Compute return on investment.
2. Compute profit margin.
3. Compute investment turnover for the year.
Assume that each of the company's divisions has a required rate of return of 8%. Compute residual income for each division.

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Tundexi

Answer:

a. Return on Investment

ROI= Operating income/Average invested assets

Beverage Division ROI = 358 / (2,680+2,602) /2

= 358 / 2,641

= 0.13555

= 13.56%

Cheese Division ROI = 643 / (4,473 + 4,409)/2

= 643 / 4,441

= 0.14478

= 14.48%

b.  Profit margin

Profit Margin= Operating income / Sales

Beverage Division = 358 / 2690

= 0.13309

=13.31%

Cheese Division = 643 / 3934

= 0.16345

= 16.35%

c. Investment turnover for the year

Investment turnover = Sales / Average invested assets

Beverage Division = 2690 / 2641 = 1.02

Cheese Division = 3934 / 4441 = 0.89

d.                            Beverage

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m        Cheese'million

Average Assets          2641                         4441

Targeted return           8%                             8%

Target income             211                            355

Residual Income      Beverage'm       Cheese'm

Operating income       358                       643

Less: Target income    211                        355

Residual Income         147                        288

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