As a way to incent competition between divisions, the president of Industrial Products told the division managers that a quarterly bonus would be paid only to the most profitable division. However, absolute division operating income as con ventionally computedwould not be used. Instead, the ranking would be affected by the relative investments in the three divisions. Options available include ROI and residual income.
Investment can be measured using gross book value or net book value. Each manager has now written a memorandum claiming entitlement to the bonus. The following data are available:
All the assets are fixed assets that were purchased ten years ago and have ten years of useful life remaining. A zero terminal disposal price is predicted. Industrial Products' required rate of return on investment used for computing residual income is 12% of investment.
Which method for computing profitability did each manager choose? Make your description specific and brief. Show supporting computations. Where applicable, assume straight-line amortization.

  • CreatedJuly 31, 2015
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