Exercise on Chapter 12 Question 1 The following data pertain to the Oliver Division of Kemper Company: Divisional contribution margin Profit margin controllable by the divisional manager Profit margin traceable to the division Average asset investment $ 700,000 320,000 294,400 1,280,000 The company uses responsibility accounting concepts when evaluating performance; Oliver's division manager is contemplating the following three investments. He can invest up to $400,000 Cost Expected income No. 1 $250,000 50,000 No.2 $300,000 54,000 No. 3 $400,000 96,000 Required: A. Calculate the ROIs of the three investments. B. What is the division manager's current ROI, computed by using responsibility accounting concepts? C. Which of the three investments would be selected if the manager's focus is on Oliver's divisional performance, as judged by ROI? Why? D. If Kemper has an imputed interest charge of 22%, compute the residual income of investment no. 3. Ir Oliver's Division manager is evaluated by residual income, is this investment attractive from Oliver's perspective? From Kemper's perspective? Why? Question 2 Jasper Corporation is organized in three separate divisions. The three divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the overall company produced a 12% return on its investment. Managers of Jasper's lowa Division recently studied an investment opportunity that would assist in the division's future growth. Relevant data follow. Income Invested capital Iowa Division $12,800,000 80,000,000 Investment Opportunity $ 4,200,000 30,000,000 Required: A. Compute the current ROI of the lowa Division and the division's ROI if the investment opportunity is pursued. B. What is the likely reaction of divisional management toward the acquisition? Why? C. What is the likely reaction of Jasper's corporate management toward the investment? Why? D. Assume that Jasper uses residual income to evaluate performance and desires an 11% minimum return on invested capital. Compute the current residual income of the lowa Division and the division's residual income if the investment is made. Will divisional management likely change its attitude toward the acquisition? Why