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How to compute the residual income for each division

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Reference no: EM132587014

SPF Inc. has two divisions that operate in Pasig City and Quezon City. Selected data on the two divisions follow:

Division

                                                                                              Pasig City               Quezon City

Sales........................................................ 9,000,000                    20,000.000

Net operating income .............................. 630,000                          1,800,000

Average operating assets........................... 3,000,000                       10,000,000

Required:

Question 1. Compute the return on investment (ROI) for each division

Question 2. Assume that the company evaluates performance by use of residual income and that the minimum required return for any division is 16%. Compute the residual income for each division.

Question 3. Is the Quezon City Division's greater residual income an indication that it is better managed. Explain.

Reference no: EM132587014

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