Fun Times Entertainment Corporation (FTEC), a subsidiary of New Age Industries, manufactures go-carts and other recreational vehicles.
Question:
New Age Industries traditionally has evaluated all of its divisions on the basis of return on investment. The desired rate of return for each division is 20 percent. The management team of any division reporting an annual increase in the ROI is automatically eligible for a bonus. The management of divisions reporting a decline in the ROI must provide convincing explanations for the decline in order to be eligible for a bonus. Moreover, this bonus is limited to 50 percent of the bonus paid to divisions reporting an increase in ROI. In the following table are condensed financial statements for both FTEC and RLI for the most recent year.
Required:
1. If New Age Industries continues to use ROI as the sole measure of divisional performance, explain why FTEC would be reluctant to acquire Recreational Leasing, Inc.
2. If New Age Industries could be persuaded to use residual income to measure the performance of FTEC, explain why FTEC would be more willing to acquire RLI.
3. Discuss how the behavior of division managers is likely to be affected by the use of the following performance measures:
(a) Return on investment
(b) Residual income.
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Fantastic news! We've located the answer you've been seeking!
Step by Step Answer:
Related Book For
Managerial Accounting Creating Value in a Dynamic Business Environment
ISBN: 978-0078025662
10th edition
Authors: Ronald Hilton, David Platt
Question Posted: