EXERCISE $11-12$

Evaluating New Investments Using Return on Investment and Residual Income $[$ LO$3,$ LO$4]$

Three divisions of Jameson Co$.$ report the following sales and operating data:

Required:

Compute the ROI for each division, using the formula stated in terms of margin and turnover.

Compute the residual income for each division.

Assume that each division is presented with an investment opportunity that would yield a rate of return of $17\%.$

a$.$ If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Reject it$?$ Why?

b$.$ If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject it$?$ Why?

CHECK FIGURE

Fitness training: ROI$=15\%$; Residual income $=$$$10,000.$