Question

Grusov Company has operating assets of $16,000,000. The company’s operating income for the most recent accounting period was $1,920,000. The Marsh Division of Grusov controls $6,000,000 of the company’s assets and earned $840,000 of its operating income. Grusov’s desired ROI is 10 percent. Grusov has $750,000 of additional funds to invest. The manager of the Marsh division believes that his division could earn $93,750 on the additional funds. The highest investment opportunity to any of the company’s other divisions is 11 percent.

Required
Round the computation to two decimal points.
a. If ROI is used as the sole performance measure, would the manager of the Marsh Division be likely to accept or reject the additional funding? Why or why not?
b. Would Grusov Company benefit if the manager of the Marsh Division accepted the additional funds? Why or why not?
c. If residual income is used as the sole performance measure, would the manager of the Marsh Division be likely to accept or reject the additional funding? Why or why not?



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  • CreatedFebruary 07, 2014
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