Ferris Ltd. of Australia has two divisions, one in Perth and one in Darwin. Sele

Question

Ferris Ltd. of Australia has two divisions, one in Perth and one in Darwin. Selected data on the two divisions follow Division Perth Darwin Sales Operating income Average operating assets $ 9,600,000 $24,000,000 768,000 2,400,000 3,200,000 ,000,000 Required. 1. Compute the ROl for each division Perth Darwin ROI 2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 17%. Compute the residual income for each division Perth Darwin Residual income 3. Is the Darwin Division's greater residual income an indication that it is better managed? Yes 0

Explanation / Answer

1. ROI = Operating Income / Average Operating Assets *100

Note:

2.

Residual Income = Operating Income - ( Average Operating Assets * Minimum Required Rate of Return)

The correct answer is :

Note :

3.

The correct answer is No.

This is because the ROI of Perth is greater than that of Darwin. Further, the ROI is is the measure to compare different divisons and determine their efficiency.

Perth Darwin ROI 24 % 20 %

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