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

Required

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

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

c. Calculate the ROI for Issac.

d. Taite has a desired ROI of 8 percent. Headquarters has $300,000 of funds to assign its investment centers. The manager of the Issac Division has an opportunity to invest the funds at an ROI of 10 percent. The other two divisions have investment opportunities that yield only 9 percent. Even so, the manager of Issac rejects the additional funding. Explain why the manager of Issac would reject the funds under these circumstances.

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