Question

Hewitt Corporation operates three investment centers. The following financial statements apply to the investment center named Ross Division.
ROSS DIVISION
Income Statement
For the Year Ended December 31, 2014
Sales revenue ............... $ 268,975
Cost of goods sold ........... (136,635)
Gross margin ............... 132,340
Operating expenses
Selling expenses ............ (13,200)
Administrative expense ......... (2,400)
Operating income ............. 116,740
Nonoperating expense
Interest expense ............ (6,800)
Net income ............... $ 109,940
ROSS DIVISION
Balance Sheet
As of December 31, 2014
Assets
Cash .................. $ 68,360
Accounts receivable ............ 380,290
Merchandise inventory .......... 53,750
Equipment less accum. dep. ........ 428,600
Nonoperating assets .......... 48,000
Total assets .............. $979,000
Liabilities
Accounts payable ........... $115,000
Notes payable ............. ..100,000
Stockholders’ equity
Common stock ............. 520,000
Retained earnings ............ 244,000
Total liab. and stk. equity ......... . $979,000

Required
a. Should operating income or net income be used to determine the rate of return (ROI) for the Ross investment center? Explain your answer.
b. Should operating assets or total assets be used to determine the ROI for the Ross investment center? Explain your answer.
c. Calculate the ROI for Ross. Round computation to 1 decimal point.
d. Hewitt has a desired ROI of 8 percent. Headquarters has $300,000 of funds to assign to its investment centers. The manager of the Ross Division has an opportunity to invest the funds at an ROI of 10 percent. The other two divisions have investment opportunities that yield only 9 percent. Even so, the manager of Ross rejects the additional funding. Explain why the manager of Ross would reject the funds under these circumstances. Round the computation to one decimal point.
e. Explain how residual income could be used to encourage the manager to accept the additional funds.



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  • CreatedFebruary 07, 2014
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