When the Bronx Company formed three divisions a year ago, the president told the division managers an annual bonus would be given to the most profitable division. The bonus would be based on either the return on investment (ROI) or residual income (RI) of the division. Investment is to be measured using gross book value (GBV) or net book value (NBV). The following data are available:
All the assets are long-lived assets that were purchased 15 years ago and have 15 years of useful life remaining. A zero terminal disposal price is predicted. Bronx's minimum rate of return (cost of capital) used for computing RI is 10%.
Required:
Which method for computing profitability would each manager likely choose? Show supporting calculations. Round percentage answers to 2 decimal places, e.g., 0.1234 as 12.34%. Where applicable, assume straight-line depreciation.

Question

When the Bronx Company formed three divisions a year ago, the president told the division managers an annual bonus would be given to the most profitable division. The bonus would be based on either the return on investment (ROI) or residual income (RI) of the division. Investment is to be measured using gross book value (GBV) or net book value (NBV). The following data are available:
  All the assets are long-lived assets that were purchased 15 years ago and have 15 years of useful life remaining. A zero terminal disposal price is predicted. Bronx's minimum rate of return (cost of capital) used for computing RI is 10%.
Required:
Which method for computing profitability would each manager likely choose? Show supporting calculations. Round percentage answers to 2 decimal places, e.g., 0.1234 as 12.34%. Where applicable, assume straight-line depreciation.

Quizplus · Accepted Answer

The Answer of When the Bronx Company formed three divisions a year ago, the president told the division managers an annual bonus would be given to the most profitable division. The bonus would be based on either the return on investment (ROI) or residual income (RI) of the division. Investment is to be measured using gross book value (GBV) or net book value (NBV). The following data are available:
  All the assets are long-lived assets that were purchased 15 years ago and have 15 years of useful life remaining. A zero terminal disposal price is predicted. Bronx's minimum rate of return (cost of capital) used for computing RI is 10%.
Required:
Which method for computing profitability would each manager likely choose? Show supporting calculations. Round percentage answers to 2 decimal places, e.g., 0.1234 as 12.34%. Where applicable, assume straight-line depreciation.

When the Bronx Company Formed Three Divisions a Year Ago