Problem 1-
ROI vs. Residual Income Using Different Asset Measures
Top management is trying to determine a consistent, but fair, valuation system to use to evaluate each of its four divisions. This year's performance data are summarized as follows:
Required:
Note: Only one division is awarded a bonus each year.
A. Which division would earn a bonus if top management used ROI based on operating assets?
B. Which division would earn a bonus if top management used ROI based on operating assets minus current liabilities?
C. Which division would earn a bonus if top management calculated residual income on the basis of operating assets with a minimum return of 12 percent?
D. Which division would earn a bonus if top management calculated residual income on the basis of operating assets minus current liabilities with a minimum return of 12 percent?