LNCE Bhd is a large manufacturing company specializing in the manufacture of a wide range of home electronic products. The company has two divisions: Computers and Home Electric. Each division operates with little intervention from Head Office and divisional managers have autonomy to make decisions about long-term investments.

LNCE Bhd measures the performance of its divisions using return on investment (ROI), calculated using controllable profit and average divisional net assets. The target ROI for each of the divisions is 18%. If the divisions meet or exceed this target the divisional managers receive a bonus.

Last year, an investment which was expected to meet the target ROI was rejected by one of the divisional managers because it would have reduced the division's overall ROI. Consequently, LNCE Bhd is considering the introduction of a new performance measure, residual income (RI), in order to discourage this dysfunctional behavior in the future. Like ROI, this would be calculated using controllable profit and divisional net assets.

The draft operating statement for the year, prepared by the company's trainee accountant, is shown below:

Sales revenue Less variable costs Contribution Less xed costs Net prot Net assets Computer Home Electric Division Division RM'000 RM'000 3,800 8,400 (1,400) (3,030) 2,400 5,370 (945) (1,420) 1,45 5 3,950 11,000 27,000