Sandhill Corporation recently announced a bonus plan to reward the manager of it

Question

Sandhill Corporation recently announced a bonus plan to reward the manager of its most profitable division. The three divisional managers are to decide which performance measure will be used to evaluate profitability. Sandhill Corporation requires a 10% minimum return on investment. The following information is available for the year just ended Gross Divisional Book Value Operating Division of Assets Income Ashton Drye Poole $800,000$94,910 744,900 91,850 456,000 58,570 (a) Calculate return on investment. (Round R01 to 2 decimal places, eg. 5.12%.) Return on Investment Ashton Drye Poole Which division performed the best?

Explanation / Answer

a. Return on Investment = Divisional Operating Income / Gross Book Value of Assets

b. Residual Income = Divisional Operating Income - ( Gross Book Value of Assets x Minimum Reuired Rate of Return)

c. Economic Value Added = Net Operating Profit After Taxes - ( Invested Capital x Weighted Average Cost of Capital)

Which division performed the best?

Drye

Return on Investment Ashton 11.86 % Drye 12.33 % Pool 12.84 %

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