PULLING Problem 15-23 Comparing return on investment and residual income Cole Corporation operates three investment centers. The following financial statements apply to the investment center named Morrison Division. CHEC C. 23. As MORRISON DIVISION Income Statement For the Year Ended December 31, 2014 Sales revenue $135,000 Cost of goods sold 78,500 Gross margin 56,500 Operating expenses Selling expenses (5,000) Depreciation expense (8,000) Operating income 43,500 Nonoperating item Loss on sale of land (15,000) Net income $ 28,500 MORRISON DIVISION Balance Sheet As of December 31, 2014 Assets Cash $ 18,580 Accounts receivable 42.266 1 MORRISON DIVISION Balance Sheet As of December 31, 2014 Assets Cash $ 18,580 Accounts receivable 42,266 Merchandise inventory 37,578 Equipment less accum. dep. 90,258 Nonoperating assets 9,000 Total assets $197,682 Liabilities Accounts payable $ 9,637 Notes payable 72,000 Stockholders' equity Common stock 80,000 Retained earnings 36,045 Total lab, and stk. equily $197,682 27 Required a. Which should be used to determine the rate of return (ROI) for the Morrison investment center, operating income or net income? Explain your answer. b. Which should be used to determine the ROI for the Morrison investment center, operating assets or total assets? Explain your answer. c. Calculate the ROI for Morrison. Round the computation to two decimal points. d. Cole has a desired ROI of 10 percent. Headquarters has $96,000 of funds to assign to its investment centers. The manager of the Morrison Division has an opportunity to invest the funds at an ROI of 12 percent. The other two divisions have investment opportunities that yield only 11 percent. Even so, the manager of Morrison rejects the additional funding. Explain why the manager of Morrison would reject the funds under these circumstances. Round the computation to two decimal points. e. Explain how residual income could be used to encourage the manager to accept the additional funds. Round the computation to whole dollars