Back Mountain Industries (BMI) has two divisions: East and West BMI has a cost-o

Question

Back Mountain Industries (BMI) has two divisions: East and West BMI has a cost-of-capital of 15.4% Selected financial information (in thousands of dollars) for the first year of business follows R&D; is assumed to benefit two periods All R&D; is spent at the beginning of the year Evaluate the performance of the two divisions assuming BMI uses residual income (Negative amounts should be indicated by a minus sign. Do not round your intermediate computations and round your final answers to two decimal places.)

Explanation / Answer

Residual income=operating income-(required rate of return×investment)

East residual income=240-(15.4%×2200)

=-98.8

West residual income=430-(15.4%×3200)

=-62.8

Since residual income is a $ measure it is often a better performance measure . This method is often preferred over ROI.

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