Question

Tripp Company has operating assets of $5,000,000. The company’s operating income for the most recent accounting period was $400,000. The Wilson Division of Tripp controls $1,200,000 of the company’s assets and earned $144,000 of its operating income. Tripp’s desired ROI is 7 percent. Tripp has $300,000 of additional funds to invest. The manager of the Wilson Division believes that his division could earn $27,000 on the additional funds. The highest investment opportunity to any of the company’s other divisions is 8 percent.

Required
a. If ROI is used as the sole performance measure, would the manager of the Wilson Division be likely to accept or reject the additional funding? Why or why not?
b. Would Tripp Company benefit if the manager of the Wilson Division accepted the additional funds? Why or why not? Round your percentages to one decimal point.
c. If residual income is used as the sole performance measure, would the manager of the Wilson 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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