Discuss and calculate various performance measures used by management such as ROI, residual income and balanced scorecards

Selected data for two divisions of the Ramble Company are given below:

South Division North Division

Net sales $4,000,000 $7,000,000

Average total assets $2,000,000 $2,000,000

Net operating income after taxes $360,000 $420,000

Average plant assets $950,000 $800,000

Average cost of capital 10% 12%

Each division is considering a capital investment of $1,000,000. The annual return on the capital investment is 11%. Invested capital is defined as total assets.

Required:

A) The South Division's manager is evaluated using residual income. Should South Division accept the capital investment? Why?

B) The North Division's manager is evaluated using residual income. Should North Division accept the capital investment? Why?

C) The South Division's manager is evaluated using return on investment. Should South Division accept the capital investment? Why?