Johnson Ceramics, a division of Sensie Corporation, has an operating income of $63,00 and total assets of $360,000. The required rate of return for the company is 13%. The company is evaluating whether it should use return on investment (ROI) or residual income (RI) as a measurement of performance for its division managers. The manager of Johnson Ceramics has the opportunity to undertake a new project that will require an investment of $90,000. This investment would earn $9,000 for Johnson Ceramics.
1. What is the original return on investment (ROI) for Johnson Ceramics (before making any additional investment)?
2. What would the ROI be for Johnson Ceramics if the investment opportunity were undertaken? Would the manager of the Johnson Ceramics division want to make this investment if she were evaluated base on ROI? Why or why not?
3. What is the ROI of investment opportunity? Would the investment be desirable from the standpoint of Sensie Corporation? Why or why not?
4. What would the residual income (RI) be for Johnson Ceramics if this investment opportunity were to be undertaken? Would the manager of the Johnson Ceramics division want to make this investment if she were evaluated based on RI? Why or why not?
5. What is the RI of investment opportunity? Would the investment be desirable from the standpoint of Sensie Corporation? Why or why not?
6. Which performance measurement method, ROI or RI, promotes goal congruence? Why?