Question 1 Pharoah Corporation recently announced a bonus plan to reward the man

Question

Question 1 Pharoah 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. Pharoah Corporation requires a 10% minimum return on investment. The following information is avallable for the year just ended Gross Divisional Book Value Operating Division of Assets Income Ashton Drye Poole $800,000 $94,880 91,440 457,00058,930 744,700 (a) Calculate return on investment. (Round R01 to 2 decimal places, eg. 5.12% Return on Investment Ashton Drye Poole 0% Which division performed the best?

Explanation / Answer

(a) Return on Investment = Operating income / Investment

Which division performed the best - Poole.

(b) Residual Income = Operating income - (assets * minimum return on Investment)

Which division performed the best -Dyre

(c) Economic value added = Operating income after tax - (capital invested * Weighted average cost of capital)

Which division performed the best -Dyre.

Division Return on Investment AShton 11.86% (94,880 / 800,000) Drye 12.28% (91,440 / 744,700) Poole 12.89% (58,930 / 457,000)

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