A food processor manufacturer has three divisions. The CEO is having a regular monthly meeting with the directors of the three divisions. The companys minimum return on investment (ROI) is 12% for all divisions.

Division B

This division manufactures blades. It operates at full capacity. All blades are transferred to other divisions of the company and are exclusive to the companys own food processor model.

Division P

This division produces plastic components for different types of kitchen appliances, including food processor. The amount of sales to other divisions is very small. Last year, the investment in Division P was $2,500,000. Sales revenue amounted to $1,500,000 while expenses were $1,175,000.

The managers of Division P have control over the level of investments.

Division W

This division produces several components for food processor and other kitchen appliances. Sales to other divisions of the corporation represent 25% of the revenues of Division W. Managers are also accountable for cost control.

Last year, sales by Divisions B and W were respectively $2,000,000 and $1,875,000. Investments in Divisions B and W amounted to $3,000,000 in each division. At the last meeting, the manager of Division B argued that the performance evaluation method used was incorrect. The CEO argued that ROI is the best measure to evaluate performance as it is a percentage and does not depend on the absolute size of the division.

Required

a. Identify what type of responsibility center each of the three divisions are. Justify your reasoning.

b. Is ROI the most relevant method for evaluating the manager of Division B? Justify your answer.

c. Compute the residual income (RI) for Division P. Explain whether RI can be used?