Gwinnett Corporation operates three investment centers. The following financial statements apply to the investment center named Rite Division:

RITE DIVISION

Income Statement

For the Year Ended December 31, 2018

Sales revenue............................................................ $300,000

Cost of goods sold................................................... (180,000)

Gross margin...............................................................120,000

Operating expenses

Selling expenses.........................................................(15,000)

Administrative expense.................................................(5,000)

Operating income.........................................................100,000

Non operating expense Interest expense..............................(10,000)

Net income..............................................................$ 90,000

RITE DIVISION

Balance Sheet

As of December 31, 2018

Assets

Cash.................................................................... $ 92,000

Accounts receivable...................................................388,000

Merchandise inventory................................................. 54,000

Equipment less accum. dep..........................................466,000

Non operating assets...................................................46,000

Total assets........................................................... $1,046,000

Liabilities

Accounts payable................................................... $140,000

Notes payable......................................................... 200,000

Stockholders' equity

Common stock........................................................ 480,000

Retained earnings..................................................... 226,000

Total liab. and stk. Equity.......................................... $1,046,000

Required

a. Should operating income or net income be used to determine the rate of return (ROI) for the Rite investment center? Explain your answer.

b. Should operating assets or total assets be used to determine the ROI for the Rite investment center? Explain your answer.

c. Calculate the ROI for Rite. Round computation to 1 decimal point.

d. Gwinnett has a desired ROI of 8 percent. Headquarters has $300,000 of funds to assign to its investment centers. The manager of the Rite Division has an opportunity to invest the funds at an ROI of 9 percent. The other two divisions have investment opportunities that yield only 6.5 percent. Even so, the manager of Rite rejects the additional funding. Explain why the manager of Rite would reject the funds under these circumstances. Round the computation to one decimal point.

e. Explain how residual income could be used to encourage the manager to accept the additional funds.