Question

Coolbrook Company has the following information available for the past year:   

	River Division			Stream Division
Sales revenue	$	1,204,000		$	1,807,000
Cost of goods sold and operating expenses		883,000			1,284,000
Net operating income	$	321,000		$	523,000
Average invested assets	$	1,020,000		$	1,460,000

   
The company’s hurdle rate is 6.26 percent.

Required:
2. Recalculate ROI and residual income for each division for each independent situation that follows: (Enter your ROI answers as a percentage rounded to two decimal places, (i.e., 0.1234 should be entered as 12.34%.))

a. Operating income increases by 8 percent.

	River Division Stream Division ROI % % Residual Income (Loss)

Answer 1

2a) Calculate ROI and residual income (loss)

	River Division	Stream Division
ROI	346680/1020000 = 33.99%	564840/1460000 = 38.69%
Residual income	346680-(1020000*6.26%) = 282828	564840-(1460000*6.26%) = 473444