$$Ceramics$,$ a division of MonetteMonette $$Corporation$,$ has an operating income of $ $82$ comma $000$$$82,000$ and total assets of $ $410$ comma $000$$$410,000.$ The required rate of return for the company is $1212\%.$ The company is evaluating whether it should use return on investment$($ROI$)$ or residual income$($RI$)$ as a measurement of performance for its division managers. The manager of OsborneOsborne Ceramics has the opportunity to undertake a new project that will require an investment of $ $164$ comma $000$$$164,000.$ This investment would earn $ $21$ comma $320$$$21,320$ for the company.$$

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Part $1$

Requirement $1.$ What is the original return on investment$($ROI$)$ for OsborneOsborne Ceramics$($before making any additional$$ investment$)?$

First determine the formula to calculate the ROI.

$-$:

$=$

ROI

Part $2$

$($Enter the percentage to two decimal$$ places.$)$

The original return on investment $($ROI$)$ for Osborne Ceramics is

$\%.$

Part $3$

Requirement $2.$ What would the ROI be for OsborneOsborne Ceramics if this investment opportunity were$$ undertaken? Would the manager of the OsborneOsborne Ceramics division want to make this investment if she were evaluated based on$$ ROI? Why or why$$ not? $($Enter the percentage to two decimal$$ places.$)$

If this investment opportunity were undertaken, the ROI would be

$\%.$

Part $4$

If the manager of this division is evaluated based on ROI she

$$

would

would not

want to make this investment. Investing in the new project would

$$

decrease

increase

the$$ division's ROI.

Part $5$

Requirement $3.$ What is the ROI of the investment$$ opportunity? Would the investment be desirable from the standpoint of MonetteMonette $$Corporation$?$ Why or why$$ not? $($Enter the percentage to two decimal$$ places.$)$

The ROI of the investment opportunity is

$\%.$

Part $6$

From the standpoint of MonetteMonette Corporation this investment

$$

is

is not

desirable. The ROI of the investment opportunity

$$

is more than

is less than

Monette'sMonette's required rate of return.

Part $7$

Requirement $4.$ What would the residual income$($RI$)$ be for OsborneOsborne Ceramics if this investment opportunity were to be$$ undertaken? Would the manager of the OsborneOsborne Ceramics division want to make this investment if she were evaluated based on$$ RI$?$ Why or why$$ not?

First determine the formula to calculate the RI$.$

$-$

$($

$\backslash$times

$)$

$=$

RI

Part $8$

$($Use parentheses or a minus sign for a negative$$ RI$.)$

The residual income $($RI$)$ for Osborne Ceramics if this investment opportunity were to be undertaken is

$.$

Part $9$

If the manager of this division is evaluated based on RI she

$$

would

would not

want to make this investment. The

$$

negative

positive

RI indicates that the division is earning

$$

more

less

than$$ management's expectations.

Part $10$

Requirement $5.$ What is the RI of the investment$$ opportunity? Would the investment be desirable from the standpoint of MonetteMonette $$Corporation$?$ Why or why$$ not? $($Use parentheses or a minus sign for a negative$$ RI$.)$

The RI of the investment opportunity is

$.$

Part $1$E$1$

From the standpoint of MonetteMonette Corporation this investment

$$

is

is not

desirable. The RI of the investment opportunity is

$$

positive

negative

$,$ meaning the investment opportunity would earn

$$

more

less

than$$ management's target required return.

Part $12$

Requirement $6.$ Which performance measurement$$ method, ROI or$$ RI$,$ promotes goal$$ congruence? Why?

Of the two performance measurement$$ methods, ROI and$$ RI$,$

$$

RI

ROI

is more likely to promote goal congruence. The RI of the investment alone is

$$

negative, meaning the investment will decrease

positive, meaning the investment will increase

the$$ division's RI by that amount. This would motivate both the division manager and the company management to

$$

make

not make

the investment. The arrival at the same conclusion by both the manager and company management

$$

does not indicate

indicates

goal congruence.

E$4$ Q$7$