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Question 6: Mervat Investments has three divisions (A, B, C) organized for performance evaluation...

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Accounting

Question 6:

Mervat Investments has three divisions (A, B, C) organized for performance evaluation purposes as investment centers. Each division's required rate of return for purposes of calculating residual income (RI) is 15%. Budgeted operating results for 2019 for each of the three divisions are as follows:

Division

Operating income

Investment

A

$

15,000,000

$

100,000,000

B

$

25,000,000

$

125,000,000

C

$

11,000,000

$

50,000,000

The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its operating income by $4,500,000.

Required:

1. Compute the current ROI for each division.

2. Compute the current residual income (RI) for each division.

3. Rank the divisions according to their current ROIs and in terms of their residual incomes.

4. Determine the effects after adding the new project to each division's ROI and residual income (RI).

5. Assuming the managers are evaluated on either ROI or residual income (RI). Which divisions are pleased with the expansion and which ones are unhappy? Explain briefly'

Please show work and explain, will rate.

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