Suppose a company evaluates divisional performance using both ROI and residual income. The company's minimum required rate of return for the purposes of residual income calculations is 12%. If a division has a residual income of $6,000, then its ROI is greater than 12%.

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Since the division has a residual income of $6,000, this means that it earned a return greater than its required rate of return of 12%. Therefore, its ROI must be greater than 12% as well. This is because ROI is calculated by dividing the division's operating income by its assets. If the division's residual income is positive (like $6,000), then its operating income must be greater than the minimum required return on its assets (which is 12%). Therefore, the division's ROI is also greater than 12%.

Suppose a Company Evaluates Divisional Performance Using Both ROI and Residual