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Purple Cow Company has three business segments: Jersey, Angus, and Brahma. Each segment had the following...

  1. Purple Cow Company has three business segments: Jersey, Angus, and Brahma.

Each segment had the following assets and generated the following margins last year:

Jersey Angus Brahma

Segment assets $100,000 $150,000 $300,000

Segment margin $ 45,000 $ 60,000 $102,000

Compute ROI for each segment

If the interest rate used to determine the segment financing charge is 20%, what is the residual income for each segment?

Which segment performed the best; the worst?

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Answer #1

A)

Formula Jersey Angus Brahma
ROI Segment margin /Segment assets

45000/100000

.45 or 45%

60000/150000

.40 or 40%

102000/300000

.34 or 34%
Residual value Segment margin -[Segment asset* Hurdle rate]

45000-[100000*.20]

45000- 20000

25000

60000-[150000*.20]

60000- 30000

30000

102000-(300000*.20)

102000- 60000

42000

In terms of ROI ,Jersey has performed Best whereas Brahma has performed worst.

In terms of Residual income , Brahma has performed best whereas Jersey has performed worst.

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