return on investment Ralph manages a regional home products store. A variety ofhardware, lumber, and small appliance items are stocked and sold to the general public. A smaller portion of the business deals with commercial customers. The store is but one of many such outlets owned and operated by a large organization. Center, or central management, loeates the various stores, makes merehandising and supply decisions, provides advertising, and so on. The store managers deal with the day-to-day operations of their store. Are gional manager assists the store manager on such items as merchandising, the need forspeeial promotions when seleeted products don't sell, and so on.

The major finaneial evaluation that Ralph labors under is the store' s retum on investment. The major assets are land, building, display fixtures, and inventory. The debt is centrally held. Cash is centrally managed.

Ralph's partieular store has been unusually successful in recent years, and center is contemplating expansion. Ralph, in a dark moment, has begun to worry that the expansion will be disruptive in the short-run, but will also bring additional land and buildings, not to mention inventory, onto the store's balance sheet.

Running the numbers suggests the accounting rate of retum will drop from 18% to around 11 % if the expansion goes fOlWard and sales keep pace at their current level of dollars per square foot of display space.

Carefully appraise the organization' s evaluation practices. Might residual income be a better summary measure? Also relate your observations to the examination of summary measure myopia in problem 10 above.

AppendixLO1