Presented below is selected information for three regional divisions of Medina C

Question

Presented below is selected information for three regional divisions of Medina Company. Compute the return on investment for each division. (Round ROI to 0 decimal places, e.g. 15.) Compute the residual income for each division (Round final answer to 0 decimal places, e.g. 1, 255.) Assume that each division has an investment opportunity that would provide a rate of return of 16 %. If ROI is used to measure performance, which division or divisions will probably make the additional investment? If residual income is used to measure performance, which division or divisions will probably make the additional investment? By accessing this Question Assistance, you will learn while you earn points based on the point potential policy set by your instructor.

Explanation / Answer

Answer 1 and 2

3. If ROI is taken as measure of performance. Assume that if each division has investment opportunity that would provide a rate of return of 16% then both division A and C have addditional investment opportunity because their ROI is 14% which is less than 16 % rate of return of investment opportunity.While Division B has 24%ROI which is More than 16% so it will not be ablw to make extra investment.

4. If performance is measured by residual income, all  Division A, Division B and Division C  probably would accept the 16% investment opportunity. The 16% rate of return promised by the new investment is greater than their required rates of return of 12% 14 % and 8%respectively, and would therefore add to the total amount of their residual income.

North$ West$ South$ Controllable Margin        139,300           360,100           209,600 Average Operating asset        995,000         1,500,417         1,497,143 Minimum rate of return%                12                   14                     8 Return on Investment %(Controllable Margin/Average Operating Asset)                14                   24                   14 Minimum required return $(Average Operating Asset*Minimum rate of return%)        119,400           210,058           119,771 Residual Income(Controllable Margin-Minimum Return)          19,900           150,042             89,829

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