Comparing return on investment and residual income Wells Corporation operates three investment centers. The following financial statements apply to the investment center named Huber Division.

Required
a. Which should be used to determine the rate of return (ROI) for the Huber investment center, operating income or net income? Explain your answer.
b. Which should be used to determine the ROI for the Huber investment center, operating assets or total assets? Explain your answer.
c. Calculate the ROI for Huber.
d. Wells has a desired ROI of 15 percent. Headquarters has $96,000 of funds to assign to its investment centers. The manager of the Huber 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. Even so, the manager of Huber rejects the additional funding. Explain why the manager of Huber would reject the funds under these circumstances.
e. Explain how residual income could be used to encourage the manager to accept the additional funds.

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HUBER DIVISION Income Statement For the Year Ended December 31, 2011 Sales revenue $105,480 (60,275) Cost of goods sold Gross margin Operating expenses Selling expenses Depreciation expense Operating income Nonoperating item Gain of sale of land 45,205 (2,840) (4,205) 38,160 (5,000) $ 33,160 Net income HUBER DIVISION Balance Sheet As of December 31, 2011 Assets $ 12,472 40,266 36,000 90,258 Cash Accounts receivable Merchandise inventory Equipment less accum. dep. Nonoperating assets 9,000 $187,996 Total assets Liabilities $ 9,637 72,000 Accounts payable Notes payable Stockholders' equity Common stock Retained earnings 80,000 26,359 $187,996 Total liab. and stk. equity