Contrasting Return on Investment (ROI) and Residual Income [LO1, LO2]

Rains Nickless Ltd. of Australia has two divisions that operate in Perth and Darwin. Selected data on the two divisions follow:

Division Perth Darwin Sales . . . . . . . . . . . . . . . . . . . . . . . $9,000,000 $20,000,000 Net operating income . . . . . . . . . . $630,000 $1,800,000 Average operating assets . . . . . . . $3,000,000 $10,000,000 Required:

1. Compute the return on investment (ROI) for each division.

2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 16%. Compute the residual income for each division.

3. Is the Darwin Division’s greater residual income an indication that it is better managed?
Explain.