Fernandes Company is submitting the following information for three of their Canadian operating divisions. ...
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Accounting
Fernandes Company is submitting the following information for three of their Canadian operating divisions.
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| Division A | Division B | Division C |
| Sales | $500,000 | $400,000 | $800,000 |
| Average operating assets | $300,000 | $500,000 | $500,000 |
| Operating Income | $45,000 | $50,000 | $70,000 |
| Minimum required rate of return | 10% | 12% | 14% |
Senior management have asked for your help in understanding the impact of performance measures on manager decision-making. They have asked you to consider what would occur if each if the divisions were presented with an investment opportunity that would yield an annual rate of return of 13%.
Required:
a. Assume that the managers of the divisions are being evaluated based on ROI. Which division(s) would likely accept the investment opportunity? Which division(s) would likely reject the investment opportunity? Why?
b. Assume that the managers of the divisions are being evaluated based on residual income. Which division(s) would likely accept the investment opportunity? Which division(s) would likely reject the investment opportunity? Why?
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