Question

Which of the following statement is TRUE regarding residual income? A. Residual income is a better performance measure than return on investment. B. Residual income motivates managers to pursue investments where the ROI associated with those investments exceeds the company’s minimum required return but is less than the ROI currently earned by the managers. C. Residual income can be used to compare the performance of divisions of different sizes. D. Some investment opportunities that should be accepted from the viewpoint of the entire company could be rejected by a manager if the manager is evaluated on the basis of residual income.

Answer #1

Residual income motivates managers to pursue investments
where the ROI associated with those investments exceeds the
company’s minimum required return but is less than the ROI
currently earned by the managers. |

Residual income is the excess of income over company's minimum required rate of return. |

Pursuing investments that exceed company's minimum required rate of return would increase residual income of managers and thus would be accepted. |

Residual income cannot be used to compare the performance of divisions of different sizes, so ROI is a better performance measure |

Option B is correct |

Which of the following statement is TRUE regarding residual
income?
A.
Some investment opportunities that should be accepted from the
viewpoint of the entire company could be rejected by a manager if
the manager is evaluated on the basis of residual income.
B.
Residual income can be used to compare the performance of
divisions of different sizes.
C.
Residual income is a better performance measure than return on
investment.
D.
Residual income motivates managers to pursue investments where
the ROI...

True or false :
a. If a company contains a number of investment centers of
differing sizes, return on investment (ROI) should be used rather
than residual income to rank the financial performance of the
divisions.
b. If a strategy is not working, it should become
evident on the balanced scorecard when some of the predicted
effects don’t occur.
c. Incentive compensation for employees, such as bonuses, should
be tied to balanced scorecard performance measures only if managers
are confident that...

Adams Company has operating assets of $20,400,000. The company’s
operating income for the most recent accounting period was
$2,570,000. The Dannica Division of Adams controls $8,360,000 of
the company’s assets and earned $1,170,000 of its operating income.
Adams’s desired ROI is 9 percent. Adams has $1,050,000 of
additional funds to invest. The manager of the Dannica division
believes that his division could earn $142,000 on the additional
funds. The highest investment opportunity to any of the company’s
other divisions is...

Exercise 11-12 Evaluating New Investments Using Return on
Investment (ROI) and Residual Income [LO11-1, LO11-2]
Selected sales and
operating data for three divisions of different structural
engineering firms are given as follows:
Division A
Division B
Division C
Sales
$
16,100,000
$
28,880,000
$
20,880,000
Average
operating assets
$
3,220,000
$
7,220,000
$
5,220,000
Net operating
income
$
644,000
$
519,840
$
626,400
Minimum required
rate of return
8.00
%
8.50
%
12.00
%
Required:
1. Compute the return
on...

Exercise 10-12 Evaluating New Investments Using Return on
Investment (ROI) and Residual Income [LO10-1, LO10-2]
Selected sales and operating data for three divisions of
different structural engineering firms are given as follows:
Division A
Division B
Division C
Sales
$
5,700,000
$
9,700,000
$
8,800,000
Average operating assets
$
1,140,000
$
4,850,000
$
1,760,000
Net operating income
$
273,600
$
853,600
$
180,400
Minimum required rate of return
17.00
%
17.60
%
14.00
%
Required:
1. Compute the return on...

ROI and Residual Income:Basic Computations
Watkins Associated Industries is a highly diversified company
with three divisions: Trucking, Seafood, and Construction. Assume
that the company uses return on investment and residual income as
two of the evaluation tools for division managers. The company has
a minimum desired rate of return on investment of 10 percent with a
30 percent tax rate. Selected operating data for three divisions of
the company follow.
Trucking Division
Seafood Division
Construction Division
Sales
$1,000,000
$690,000
$900,000...

Capital Investments has three divisions. Each division's
required rate of return is 15%. Planned operating results for 2018
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 income
by $4,500,000.
Required: a. Compute the current ROI for each division. b.
Compute the current residual income for each division. c. Rank the
divisions according...

E10-7 Evaluating Managerial Performance Using Return on
Investment, Residual Income [LO 10-4, 10-5]
Orange Corp. has two divisions: Fruit and Flower. The following
information for the past year is available for each division:
Fruit Division
Flower Division
Sales revenue
$
1,560,000
$
2,340,000
Cost of goods sold and operating
expenses
1,170,000
1,755,000
Net operating income
$
390,000
$
585,000
Average invested assets
$
4,875,000
$
2,437,500
Orange has established a hurdle rate of 6
percent.
Required:
1-a. Compute each...

ROI and Residual Income:Basic Computations
Watkins Associated Industries is a highly diversified company with
three divisions: Trucking, Seafood, and Construction. Assume that
the company uses return on investment and residual income as two of
the evaluation tools for division managers. The company has a
minimum desired rate of return on investment of 10 percent with a
30 percent tax rate. Selected operating data for three divisions of
the company follow.
Trucking Division
Seafood Division
Construction Division
Sales
$1,000,000
$690,000
$900,000...

ROI and Residual Income:Basic Computations
Watkins Associated Industries is a highly diversified company with
three divisions: Trucking, Seafood, and Construction. Assume that
the company uses return on investment and residual income as two of
the evaluation tools for division managers. The company has a
minimum desired rate of return on investment of 10 percent with a
30 percent tax rate. Selected operating data for three divisions of
the company follow.
Trucking Division
Seafood Division
Construction Division
Sales
$1,200,000
$780,000
$900,000...

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