Question
Ivanhoe Corporation recently announced a bonus plan to be awarded to the vice-president of the most profitable division. The three managers are to choose whether
Ivanhoe Corporation recently announced a bonus plan to be awarded to the vice-president of the most profitable division. The three managers are to choose whether the ROI or residual income (RI) will be used to measure profitability. In addition, they must decide whether investments will be measured using the gross book value (GBV) or net book value (NBV) of assets. Ivanhoe defines income as operating income and investments as total assets. The following information is available for the year just ended:
Division | Gross Book Value of Assets | Accumulated Depreciation | Operating Income | ||||||
---|---|---|---|---|---|---|---|---|---|
A | $870,000 | $435,000 | $108,750 | ||||||
B | 710,000 | 426,000 | 80,230 | ||||||
C | 240,000 | 48,000 | 48,000 |
NBV ROI | [A] | 25.00 | % | ||
[B] | 28.25 | % | |||
[C] | 25.00 | % |
GBV RI | [A] | $21,750 | ||
[B] | $9,230 | |||
[C] | $24,000 |
Ivanhoe uses a required rate of return of 10% on investments to calculate RI. Calculate ROI and RI for all the three divisions by using GBV and NBV. (Round ROI to 2 decimal places, e.g. 15.25%.)
ROI | RI | ||||||
---|---|---|---|---|---|---|---|
GBV | NBV | GBV | NBV | ||||
Division A | enter percentages % | enter percentages % | $enter a dollar amount | $enter a dollar amount | |||
Division B | enter percentages % | enter percentages % | enter a dollar amount | enter a dollar amount | |||
Division C | enter percentages % | enter percentages % | enter a dollar amount | enter a dollar amount |
Which method for calculating performance did each vice-president use if each one wanted to show that his or her division had the best performance?
The vice-president of division A used select a method Residual income with GBVROI with NBVROI with GBV or Residual income with GBVROI with GBVResidual income with NBV. |
The vice-president of division B used select a method Residual income with NBV ROI with GBV or Residual income with GBVResidual income with GBVROI with NBVROI with GBV. |
The vice-president of division C used select a method ROI with NBVResidual income with NBV ROI with GBV or Residual income with GBV. |
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