Question
Case 2:ResidualIncome John is the manager of a production division in ABC Company.ABC Company evaluates John's performanceusingtheROIofhisdivision,whichisthebasisofJohn'sbonus.IfROIismaintainedorincreased,John's bonuswillbe1%ofthenetoperating income.Ifyour ROI decreases,Johnwillnotreceive anybonus. John's division currently
Case 2:ResidualIncome
John is the manager of a production division in ABC Company.ABC Company evaluates John's performanceusingtheROIofhisdivision,whichisthebasisofJohn'sbonus.IfROIismaintainedorincreased,John's bonuswillbe1%ofthenetoperating income.Ifyour ROI decreases,Johnwillnotreceive anybonus.
John's division currently has an average operating asset of P120,000, and the net operating income of yourdivisionisP30,000.Now,Johnisconsideringpurchasinganewmachine thatwouldcostP40,000 andyieldanadditionalnetoperatingincomeof P5,000toJohn'sdivision.
Required:WillJohnapprovethepurchase ofthemachine? WilltheCompany benefitfromthisacquisition?Toanswer this question,youneedto:
- ComputefortheROI ofthedivision(beforeandafter theacquisition)
- ComputeforResidual incomeof the division(before andaftertheacquisition)
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Core Concepts Of Accounting
Authors: Leslie Breitner, Robert Anthony
11th Edition
0133125947, 9780133125948
