Palmo Corporation recently introduced a new bonus scheme that will reward managers based on their divisions profitability. Palmer has yet to decide whether it will use Return-on-Assets (ROA) or Residual Income (RI) to measure the profitability of divisions.

ROA = operating income / assets employed

OR

RI = operating income - (12% x assets employed)

However, the firm has decided to allow the divisional managers to decide for themselves whether 'assets employed' by their division will be valued at the cost of acquiring the asset (acquisition cost) or at the written-down book value of the asset (book-value).

Regional divisionOperating incomeAcquisition cost of assets employedAccumulated depreciationBook value of the assets employedMelbourne$2,300,000$13,000,000$3,000,000$10,000,000Sydney$3,000,000$29,000,000$9,000,000$20,000,000

Assume each manager sole priority is to maximize their reported profitability.

Which of the following statements is likely to be true?

[Select one or more statements.]

Group of answer choices

A.The manager of the Melbourne division is more likely to select 'acquisition cost'. The manager of the Sydney division is more likely to select 'book value'.

B.Both the Melbourne and Sydney managers are indifferent to how the firm measures investment. All that matters is whether the firm uses ROA or RI in the bonus schemes.

C.The use of 'Acquisition cost' may mitigate some of the undesirable managerial behaviours relating to the replacement of depreciated assets.

D.Both divisional managers are more likely to select 'acquisition cost', because it gives higher ROA and RI.

E.Both divisional managers are more likely to select 'book value', because it gives higher ROA and RI.