From Managerial Accounting, 11th Canadian Edition by Garrison, Libby, Webb, Noreen, Brewer 2018

Three divisions of Jameson Co report the following sales and operating data

Fitness Training Spa Services Athletic Wear

Sales $600,000 $750,000 $400,000

Average operating assets 200,000 250,000 100,000

Operating income 30,000 37,500 24,000

Minimum required rate of return 10% 12% 10%

Required:

1. Compute the ROI for each division.

2. Compute the residual income for each division.

3. Assume that each division is presented with an investment opportunity that would yield a rate of return of 17%.

a) If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Reject it? Why?

b) If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject it? Why