Beaumont Trading Company (BTC) has three divisions. BTC has a desired rate of return of 6.0 percent. The operating assets and income for each division are as follows:
Divisions Operating Assets Operating Income
Americas............................... $2,250,000........................... $270,000
Asia...................................... 1,250,000..............................125,000
Europe................................... 1,500,000............................. 120,000
Total.................................... $5,000,000........................... $515,000
BTC headquarters has $250,000 of additional cash to invest in one of its divisions. The division managers have identified investment opportunities that are expected to yield the following ROIs.
Divisions Expected ROIs for Additional Investments
Americas.................................................................................... 10.0%
Asia.............................................................................................. 5.6
Europe.......................................................................................... .9.0
Required
a. Which division manager is currently producing the highest ROI?
b. Based on ROI, which division manager would be most eager to accept the $250,000 of investment funds?
c. Based on ROI, which division manager would be least likely to accept the $250,000 of investment funds?
d. Which division offers the best investment opportunity for BTC?
e. What is the term used to describe the apparent conflict between Requirements b and d?
f. Explain how the residual income performance measure could be used to motivate the managers to act in the best interest of the company.
g. Calculate the residual income:
(1) At the corporate (headquarters) level before the additional investment.
(2) At the division level before the additional investment.
(3) At the investment level.
(4) At the division level after the additional investment.
h. Based on residual income, which division manager would be most eager to accept the $250,000 investment opportunity?