Problem #2 Performance measurements

A multinational corporation has a number of divisions, two of which are the Pacific Rim Division and the European Division. Data of the two divisions are as follows:

	Pacific Rim	European
Average operating assets	900,000	9,000,000
Operating income	126,000	1,350,000
Minimum required return	12%	12%

1. Compute residual income for each division. By comparing residual income, is it possible to make a useful comparison of divisional performance? Explain.
2. Compute the residual rate of return by dividing the residual income by the average operating assets. Is it possible now to say that one division outperformed the other? Explain.
3. Compute the return on investment for each division. Can we make a meaningful comparison of divisional performance? Explain.

Add the residual rate of return computed in Requirement 2 to the required rate of return. Compare these rates with the ROI computed in Requirement 3. Will this relationship always be the same?