..manufactures two products, Alpha and Gamma. The company is a decentralized company with Alpha and Gamma organized into separate divisions. The following information is available:

REQUIRED:

What is ROI? What are the advantages and disadvantages of using this method for evaluation divisional performance?

What is RI (Residual income)? What are the advantages and disadvantages of using this method for evaluating divisional performance?

What is a hurdle rate? How might a company come up with this? What factors should be considered?

Without making ANY calculations, determine whether each divisions ROI is above or below the required rate. How can you tell?

Determine the missing amounts in the table above.

What hurdle rate is being used?

Assume for the remainder of the problem that WHITE has a hurdle rate of 6% on all investment projects.

Now assume that the company has the opportunity to invest additional assets to help expand the companys market share. The expansion would require an average investment of $2 million and would generate $140,000 in additional income. From the Corporations perspective overall, is this a viable investment opportunity? Why or why not?

Suppose the two divisions would equally share the investment and profits from the new expansion project referred to above. If ROI is used to evaluate performance, what will each division manager think about the proposed project?

Assume the same facts except that they will evaluate performance using residual income instead of ROI. Will either division managers preference change from #7 above?

THOUGHT QUESTIONS NO COMPUTATIONS NEEDED

Notice that when computing both ROI and RI, we are using numbers for return or profit and numbers for assets or investment. Where should we get these numbers from. In other words, what is the right number to use for profit? What are the advantages and disadvantages of using this number? What other numbers could we use?

Same question with assets or investment what number do we use for these? Why? What other numbers could be used? Whats the right number?

In computing the RI, we are using a hurdle rate where does this come from? What are the advantages and disadvantages of using this number? What other numbers could we use? Whats the right number?