Meridian Investments has three divisions (A, B, C) organized for performance-evaluation purposes as investment centers. Each division's required rate of return for purposes of calculating residual income (RI) is 15%. Budgeted operating results for 2013 for each of the three divisions are as follows:
The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its income by $4,500,000.
Required:
1. Compute the current ROI for each division.
2. Compute the current residual income (RI) for each division.
3. Rank the divisions according to their current ROIs and residual incomes.
4. Determine the effects after adding the new project to each division's ROI and residual income (RI).
5. Assuming the managers are evaluated on either ROI or residual income (RI), which divisions are pleased with the expansion and which ones are unhappy? Explain briefly.

Question

Meridian Investments has three divisions (A, B, C) organized for performance-evaluation purposes as investment centers. Each division's required rate of return for purposes of calculating residual income (RI) is 15%. Budgeted operating results for 2013 for each of the three divisions are as follows:
  The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its income by $4,500,000.
Required:
1. Compute the current ROI for each division.
2. Compute the current residual income (RI) for each division.
3. Rank the divisions according to their current ROIs and residual incomes.
4. Determine the effects after adding the new project to each division's ROI and residual income (RI).
5. Assuming the managers are evaluated on either ROI or residual income (RI), which divisions are pleased with the expansion and which ones are unhappy? Explain briefly.

Quizplus · Accepted Answer

The Answer of Meridian Investments has three divisions (A, B, C) organized for performance-evaluation purposes as investment centers. Each division's required rate of return for purposes of calculating residual income (RI) is 15%. Budgeted operating results for 2013 for each of the three divisions are as follows:
  The company is planning an expansion, which will require each division to increase its investments by $25,000,000 and its income by $4,500,000.
Required:
1. Compute the current ROI for each division.
2. Compute the current residual income (RI) for each division.
3. Rank the divisions according to their current ROIs and residual incomes.
4. Determine the effects after adding the new project to each division's ROI and residual income (RI).
5. Assuming the managers are evaluated on either ROI or residual income (RI), which divisions are pleased with the expansion and which ones are unhappy? Explain briefly.

Meridian Investments Has Three Divisions (A, B, C) Organized for Performance-Evaluation