The Hydride Division of Murdoch Corporation is an investment center. It has $4,000,000 of operating assets. During 2014, the Hydride Division earned operating income of $720,000 on $12,000,000 of sales. Murdoch's companywide return on investment (ROI) is approximately 14%.
Required
a.Compute the ROI for the Hydride Division.
b.Calculate the two ratios into which ROI can be subdivided, margin and turnover, for the Hydride Division. What useful information can management gain by analyzing these two performance measures?
c.Assume Murdoch uses ROI to rank managerial performance. The Hydride Division has the highest ROI in the company. Hydride's nearest internal competitor is the NiCad Division, which has an average ROI of 17%. Murdoch needs to invest excess capital. The manager of the Hydride Division has the opportunity to expand existing capacity by investing an additional $4,000,000 in machinery. The expected ROI for the machinery investment is 15%. Should Hydride's manager accept or reject the investment opportunity? Why?
d.Suppose Murdoch changes its performance assessment measure from ROI to residual income (RI). Murdoch's desired rate of return is 14%. Under these circumstances, should Hydride's manager accept or reject the opportunity to invest the additional $4,000,000 in machinery as described in requirement c?