Question

Thornton Corporation operates three investment centers. The following financial statements apply to the investment center named Bowman Division.

BOWMAN DIVISION
Income Statement
For the Year Ended December 31, Year 2
Sales revenue	$	106,880
Cost of goods sold		59,875
Gross margin		47,005
Operating expenses
Selling expenses		(2,720	)
Depreciation expense		(4,055	)
Operating income		40,230
Nonoperating item
Loss on sale of land		(4,200	)
Net income	$	36,030

BOWMAN DIVISION
Balance Sheet
As of December 31, Year 2
Assets
Cash	$	12,502
Accounts receivable		40,326
Merchandise inventory		36,300
Equipment less accumulated depreciation		90,308
Nonoperating assets		10,800
Total assets	$	190,236
Liabilities
Accounts payable	$	9,567
Notes payable		65,000
Stockholders’ equity
Common stock		73,000
Retained earnings		42,669
Total liabilities and stockholder's equity	$	190,236

Required

3. Calculate the ROI for Bowman.

4. Thornton has a desired ROI of 14 percent. Headquarters has $95,000 of funds to assign to its investment centers. The manager of the Bowman Division has an opportunity to invest the funds at an ROI of 16 percent. The other two divisions have investment opportunities that yield only 15 percent. Calculate the new ROI for Bowman division, if the investment opportunity is adopted by Bowman.

5. Based on the original data, calculate the original residual income. Also, calculate the new residual income based on information provided in Requirement d.

Answer 1