ABC Company develops and manages real estate properties. It operates two divisions: Commercial Real Estate and Residential Real Estate. The Commercial division leases long-term warehouse space. The Residential division rents upscale apartments, typically under short-term leases and is subject to high turnover. The financial information for each division is presented below: Commercial Residential $ 800,000 Total Assets 1,000,000 Revenues 1,200,000 750,000 120,000 Operating Income 90,000 1. Use the DuPont formula to determine the return on investment for each division.
2. Determine the residual income for each division, assuming a minimum acceptable return of 10% of total assets. Assuming each division's employees share in any positive residual income in the amount of 25%, how much is each division's bonus pool?
3. Interpret the results by analyzing the components of return on investment. What is a possible explanation for the results? What are the areas needing improvement?
4. Assume that the Residential division can outsource the apartment building's recreational facilities resulting in increased expense of $15,000 and a reduction of assets of $375,000. Recompute return on investment using the DuPont formula and interpret the results. Should this course of action be taken?