The following financial statements apply to Vita division, one of three investment centers operated by Nexis Corporation. Nexis Corporation has a desired rate of return of 15%. Nexis Corporation headquarters has N$80 000 of additional operating assets to assign to the investment centers.

Vita Division Income Statement for the year ended 30 August 2021

	N$
Sales Revenue	78 695
Cost Of Goods Sold	(50 810)
Gross Margin	27 885
Operating Expenses
Selling Expenses	(1 200)
Depreciation Expenses	(1 125)
Operating Income	25 560
Non-Operating Expense
Loss on sale of Land	(3 200)
Net Income	22 360

Below is a Balance Sheet of Vita Division as at 31 August 2021

Assets	N$
Cash	8 089
Account Receivables	22 870
Merchandise Inventory	33 460
Equipment	77 581
Non – Operating Assets	8 250
Total Assets	150 250
Liabilities
Account payable	5 000
Notes Payable	58 000
Stock Holder equity
Common Stock	55 000
Retained Earnings	32 250
Total Liability & Stock Holder Equity	150 250

REQUIRED:

1. Should Nexis Corporation use operating income or net income to determine its Return On Investment rate for the Vita investment center? Explain

2. A) Should Nexis Corporation use operating assets or total assets to determine Return On Investment for the Vita investment center?

B) Calculate the ROI for Vita Division.

3. The manager of the Vita Division has an opportunity to invest the funds at an ROI of 17 percent. The other two divisions have investment opportunities that yield only 16 percent. The manager of Vita Division rejects the additional funding. Why would the manager of Vita Division reject the funds under these circumstances?

4. Calculate the residual income from the investment opportunity available to Vita Division and explain how residual income could be used to encourage the manager to accept the additional funds.

Answer rating: 100% (QA)

11 In evaluating investment centers for calculating sROI we use oper... View the full answer