National Motors is a major car manufacturer with a wide variety of models, including its most recent one, the Mountaineer. The new model uses parts and components from external suppliers, as well as some from the following divisions of National Motors:
Division S:
This division manufactures stainless steel components for the Mountaineer and other models sold by National Motors.
Sales of components for the Mountaineer represent 25% of the division's revenue.
Division F:
This division produces different wipers that fit a wide variety of car models manufactured by National Motors and other major car manufacturers. Sales of wipers for the Mountaineer are negligible. Division F has total assets of $250 million. Last year's revenues were $150 million with operating expenses of $117.5 million.
Division D:
This division uses all its capacity to manufacture engines for the Mountaineer. The division manager is strictly responsible for choosing the inputs used to produce the engines.
National Motors uses the return on investment to evaluate the performance of the division managers. The required rate of return of 14% is the same for all divisions.
At the last meeting of the division managers, Mr. Thiessen, manager of division D, was not happy because he thought that he was not evaluated fairly. The chief executive officer of National Motors did not understand why Mr. Thiessen's evaluation would be unfair as she thought that the ROI was the best measure available to evaluate performance.
Instructions
(a) Calculate the residual income for division F based on last year's results and investment. Show your calculations.
(b) Identify which type of responsibility centre each of the three divisions should be. Briefly explain your reasoning.
(c) Is the ROI appropriate to evaluate the performance of Mr. Thiessen and division D? Briefly explain your answer.