Question

Vaughan Company has 3 divisions with the following information:

	Division A	Division B	Division C
Sales	$750,000	$700,000	$360,000
Net Operating Income	$30,000	$35,000	$36,000
Average Operating Assets	$200,000	$500,000	$300,000
Minimum Required Rate of Return	8%	15%	9%

Assume that each division was presented with an investment opportunity that would yield a rate of return of 11%. If performance is being measured by residual income a.both division A and C would invest in the project, b.only division B will would invest in the project, c.only division A would invest in the project, d.only division C will would invest in the project, e.all of the divisions would invest in the project, f.none of the divisions would invest in the project because a.11% is equal to or higher than their minimum required rate of return, b.11% is greater than their current ROI, c.11% is less than their current ROI

Answer 1

residual income = Average operating assets (Actual rate of return-minimum required rate of return)

Ifthe performance is based on residual income, the project with actual rate of return> Minimum required rate of return would be selected

any project whose rate of return< minimum required rate of return shall be rejected

Here Actual return of new opportunity is 11%

So project with minimum required return< 11% will be accepted

	A	B	C
Minumum rate of return	8%	15%	9%
Actual rate of return	11%	11%	11%
decision	Accept	Reject	Accept
	Actual return>Minimum return	Actual return<Minimum return	Actual return> minimum return

a)both division A and C would invest in the project,

a)11% is equal to or higher than their minimum required rate of return,