Presented below is selected information for two regional divisions of Yono Company:
_____________________________________Divisions________
______________________________North West
Sales.....................................$400,000................$450,000
Operating income.........................50,000...................75,000
Average investment.....................100,000..................200,000
Instructions
(a) Calculate the return on investment for each division and break it down into the return on sales and investment turnover.
(b) What is the residual income for each division if the required rate of return is 15%?
(c) Assume that each division has an investment opportunity that would provide a rate of return of 20%. If the ROI is used to measure performance, which division or divisions will probably make the additional investment?
(d) Assume the same opportunity as in (c), except that residual income is used to measure performance. Which division or divisions will probably make the additional investment?