Return on investment and residual income Quest Company has operating assets of $20,000,000. The company’s operating income for the most recent accounting period was $2,500,000. The Western Division of Quest controls $8 million of the company’s assets and earned $1,120,000 of its operating income. Quest’s desired ROI is 12 percent.

Quest has $1 million of additional funds to invest. The manager of the Western division believes that his division could earn $135,000 on the additional funds. The highest investment opportunity to any of the company’s other divisions is 13 percent.

Required

a. If ROI is used as the sole performance measure, would the manager of the Western Division be likely to accept or reject the additional funding? Why or why not?

b. Would Quest Company benefit if the manager of the Western Division accepted the additional funds. Why or why not?

c. If residual income is used as the sole performance measure would the manager of the Western Division be likely to accept or reject the additional funding? Why or why not?