Question

# Vaughan Company has 3 divisions with the following information: Division A Division B Division C Sales...

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

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

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,

#### Earn Coins

Coins can be redeemed for fabulous gifts.