Helena Corporation operates three investment centers. The following financial statements apply to the investment center named Bowman Division:
BOWMAN DIVISION
Income Statement
For the Year Ended December 31, 2018
Sales revenue................................................................. $138,000
Cost of goods sold........................................................... 78,000
Gross margin.................................................................... 60,000
Operating expenses
Selling expenses.............................................................. (6,000)
Depreciation expense........................................................ (8,000)
Operating income............................................................... 46,000
Non operating item
Loss on sale of land........................................................ (16,000)
Net income................................................................... $ 30,000
BOWMAN DIVISION
Balance Sheet
As of December 31, 2018
Assets
Cash............................................................................. $ 18,898
Accounts receivable............................................................. 42,266
Merchandise inventory.......................................................... 37,578
Equipment less accum. dep..................................................... 90,258
Non operating assets.............................................................. 9,000
Total assets..................................................................... $198,000
Liabilities
Accounts payable............................................................... $ 9,637
Notes payable.................................................................... 72,000
Stockholders' equity
Common stock.................................................................. 80,000
Retained earnings.............................................................. 36,363
Total liab. and stk. Equity................................................. $198,000
Required
a. Which should be used to determine the rate of return (ROI) for the Bowman investment center, operating income or net income? Explain your answer.
b. Which should be used to determine the ROI for the Bowman investment center, operating assets or total assets? Explain your answer.
c. Calculate the ROI for Bowman. Round the computation to two decimal points.
d. Cole 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.
e. Explain how residual income could be used to encourage the manager to accept the additional funds. Round the computation to whole dollars.