Question

Cole Corporation operates three investment centers. The following financial statements apply to the investment center named Morrison Division.
MORRISON DIVISION
Income Statement
For the Year Ended December 31, 2014
Sales revenue ................. $135,000
Cost of goods sold .............. 78,500
Gross margin .................. 56,500
Operating expenses
Selling expenses ............... (5,000)
Depreciation expense ............. (8,000)
Operating income ................ 43,500
Nonoperating item
Loss on sale of land ............. (15,000)
Net income ................. $ 28,500
MORRISON DIVISION
Balance Sheet
As of December 31, 2014
Assets
Cash ................... $ 18,580
Accounts receivable ................ 42,266
Merchandise inventory ............ 37,578
Equipment less accum. dep. ........... 90,258
Nonoperating assets .............. 9,000
Total assets .................. $197,682
Liabilities
Accounts payable ................ $ 9,637
Notes payable ................ 72,000
Stockholders’ equity
Common stock ................ 80,000
Retained earnings ................ 36,045
Total liab. and stk. equity ............. $197,682

Required
a. Which should be used to determine the rate of return (ROI) for the Morrison investment center, operating income or net income? Explain your answer.
b. Which should be used to determine the ROI for the Morrison investment center, operating assets or total assets? Explain your answer.
c. Calculate the ROI for Morrison. Round the computation to two decimal points.
d. Cole has a desired ROI of 10 percent. Headquarters has $96,000 of funds to assign to its investment centers. The manager of the Morrison Division has an opportunity to invest the funds at an ROI of 12 percent. The other two divisions have investment opportunities that yield only 11 percent. Even so, the manager of Morrison rejects the additional funding. Explain why the manager of Morrison would reject the funds under these circumstances. Round the computation to two decimal points.
e. Explain how residual income could be used to encourage the manager to accept the additional funds. Round the computation to whole dollars.



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  • CreatedFebruary 07, 2014
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