PROBLEMS 10-1 ROI and Divisional Performance The Solomons Company uses ROI to measure the performance of...

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PROBLEMS 10-1 ROI and Divisional Performance The Solomons Company uses ROI to measure the performance of its operating divisions. A summary of the annual reports from two divisions is shown below. The company's cost of capital is 12%. DIVISION A DIVISION B Capital invested Net income $2400 $ 480 $4000 $ 720 ROI 20% 18% Required (1) Which division is more profitable? At what cost of capital would the two divisions be considered equally profitable? (3) What performance measurement procedure would more clearly show the relative prof- itability of the two divisions? (4) Suppose the manager of Division A were offered a one-year project that would increase his investment base (for that year) by $1,000 and show a profit of $150. Would the manager accept this project if he were evaluated on his divisional ROI? Should he ac- cept this project? PROBLEMS 10-1 ROI and Divisional Performance The Solomons Company uses ROI to measure the performance of its operating divisions. A summary of the annual reports from two divisions is shown below. The company's cost of capital is 12%. DIVISION A DIVISION B Capital invested Net income $2400 $ 480 $4000 $ 720 ROI 20% 18% Required (1) Which division is more profitable? At what cost of capital would the two divisions be considered equally profitable? (3) What performance measurement procedure would more clearly show the relative prof- itability of the two divisions? (4) Suppose the manager of Division A were offered a one-year project that would increase his investment base (for that year) by $1,000 and show a profit of $150. Would the manager accept this project if he were evaluated on his divisional ROI? Should he ac- cept this project?