The manager of Princeton Therapeutic’s Hospital division is evaluated on her division’s return on investment and residual income. The company requires that all divisions generate a minimum return on invested assets of 20 percent. Consistent failure to achieve this minimum target is grounds for the dismissal of a division manager. The annual bonus paid to division managers is 3 percent of residual income in excess of $800,000. The Hospital division’s operating margin for the year was $15 million, during which time its average invested capital was $60 million.

Instructions.
a. Compute the Hospital division’s return on investment and residual income.
b. Will the manager of the Hospital division receive a bonus for her performance? If so, how much will it be?
c. What are some advantages and disadvantages of using ROI as a performance measurement criterion?