Question

Cleary Ceramics, a division of Alderman Corporation, has an operating income of $ 77,000 and total assets of $ 440,000. The required rate of return for the company is 15%. 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 Cleary Ceramics has the opportunity to undertake a new project that will require an investment of $ 110,000. This investment would earn $ 13,200 for the company.

Requirements
1. What is the original return on investment (ROI) for Cleary Ceramics (before making any additional investment)?
2. What would the ROI be for Cleary Ceramics if this investment opportunity were ­undertaken? Would the manager of the Cleary Ceramics division want to make this investment if she were evaluated based on ROI? Why or why not?
3. What is the ROI of the investment opportunity? Would the investment be desirable from the standpoint of Alderman Corporation? Why or why not?
4. What would the residual income (RI) be for Cleary Ceramics if this investment ­opportunity were to be undertaken? Would the manager of the Cleary Ceramics ­division want to make this investment if she were evaluated based on RI? Why or why not?
5. What is the RI of the investment opportunity? Would the investment be desirable from the standpoint of Alderman Corporation? Why or why not?
6. Which performance measurement method, ROI or RI, promotes goal congruence? Why?



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  • CreatedAugust 27, 2014
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