1 Question 2: Compare ROI and Residual Income (12 marks) 2. 3 Northern Pride Inc., a diversified company, operates four departments. The company has collected the following departmental information for 2020: 4 Required: Part 1: a. Calculate ROI (column G) and rank the four departments (column H) based on their return on investment (ROI). The highest ranking should be scored as 1 and the lowest ranking should be 4. (3 marks) 5 6 b. Calculate residual income (column l) and rank the four departments (column J) based on their residual income. (3 marks). The highest ranking should be scored as 1 and the lowest ranking should be 4. 7 00 8 20% Assume that the company requires a minimum return on the current investment of: 9 Parta 10 Cost of Goods Part b Ranking Residual Based on Income in Residual dollars) Income Department Sales Average Operating Assets Operating Expenses Operating Income Ranking Based on ROI Sold ROI (as percentage) 11 500,000 300,000 $ $2,000,000 $1,200,000 $ $1,750,000 A 12 1,800,000 500,000 B 1,000,000 400,000 200,000 $ 400,000 13 300,000 150,000 60,000 $ 90,000 14 D 275,000 125,000 45,600 $ 104,400 15 16 *** Formulas or cell references must be used to receive marks for all questions in this exam. 400,000 Part 2: Each department manager has been presented with a new investment opportunity that promises a 19% return on investment (ROI). Which department(s) are likely to accept or reject the opportunity if their performance is measured by (2 marks): 1. ROI? 2. Residual income? 18 1. Evaluated based on ROI 2. Evaluated based on Residual Department 19 Income 20 21 B 22 23 D 24 3. Why will the departments accept or reject if they are evaluated based on ROI? Explain your answer in a way that a non-accountant can understand. (2 marks) 25 26 4. Why will the departments accept or reject if they are evaluted based on Residual Income? 27 Explain your answer in a way that a non-accountant can understand. (2 marks) + Exam Formulas = 01 A Final Fxam 02 03 04 05 06