Problem 15-23

Problem 15-23 Comparing return on investment and residual income Helena Corporation operates three investment centers. The following financial statements apply to the investment named Bowman Division. BOWMAN DIVISION Income Statement For the Year Ended December 31, 2018 138,000 78,000 Sales revenue Cost of goods sold Gross margin Operating expenses 60,000 (6.000) Selling expenses Depreciation expense 46,000 Operating income Nonoperating itom 16, 30,000 Loss on sale of land Net income BOWMAN DIVISION Balance Sheet As of December 31, 2018 Assets Cash Accounts receivable Morchandise inventory Equipment less accum. dep. Nonoperating assets 18,898 42,266 7,578 90,258 9,000 198,000 Total assets Liabilities Accounts payable Notos payable 9,637 2,000 Stockholders' equity 80,000 Common stock Rotained earnings Total liab. and stk, equity $198,000 Required Which should be used to determine the rate of return (ROI) for the Bowman investment center, operating income or net income? Explain your answer. Which should be used to determine the ROI for the Bowman investment center, operating assets or total assets? Explain your answer Calculate the ROI for Bowman. Round the computation to two decimal points. Helena has a desired ROI of 10 percent. Headquarters has $96,000 of funds to assign to its investment centers. The manager of the Bowman Division has an opportunity to invest the funds at an ROI of 12 percent. The other two divisions have investment opportunities that yield only 11 percent. Even so, the manager of Bowman rejects the additional funding. Explain why the manager of Bowman would reject the funds under these circumstances. Round the computation to two decimal points. Explain how residual income could be used to encourage the manager to accept the additional funds. Round the computation to whole dollars. a. b. e. d. e. LO 15-6, 15-7 CHECK FIGURES b, The ROI would decline to 19.60%. c. RI would increase by $30,000