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Cornerstones of Cost Accounting 1st Edition by Don Hansen,Maryanne Mowen
Edition 1ISBN: 978-0538736787Cornerstones of Cost Accounting 1st Edition by Don Hansen,Maryanne Mowen
Edition 1ISBN: 978-0538736787 Exercise 14
ROI AND RESIDUAL INCOME
A multinational corporation has a number of divisions, two of which are the North American Division and the South American Division. Data on the two divisions are as follows:
Round all rates of return to four significant digits.
Required:
1. Compute residual income for each division. By comparing residual income, is it possible to make a useful comparison of divisional performance? Explain.
2. Compute the residual rate of return by dividing the residual income by the average operating assets. Is it possible now to say that one division outperformed the other? Explain.
3. Compute the return on investment for each division. Can we make meaningful comparisons of divisional performance? Explain.
4. Add the residual rate of return computed in Requirement 2 to the required rate of return. Compare these rates with the ROI computed in Requirement 3. Will this relationship always be the same?
A multinational corporation has a number of divisions, two of which are the North American Division and the South American Division. Data on the two divisions are as follows:
Round all rates of return to four significant digits.
Required:
1. Compute residual income for each division. By comparing residual income, is it possible to make a useful comparison of divisional performance? Explain.
2. Compute the residual rate of return by dividing the residual income by the average operating assets. Is it possible now to say that one division outperformed the other? Explain.
3. Compute the return on investment for each division. Can we make meaningful comparisons of divisional performance? Explain.
4. Add the residual rate of return computed in Requirement 2 to the required rate of return. Compare these rates with the ROI computed in Requirement 3. Will this relationship always be the same?
Explanation
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Verified
1.
Computation of the residual income f...
Cornerstones of Cost Accounting 1st Edition by Don Hansen,Maryanne Mowen
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