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QUESTION 3 Compute the Return on Investment (ROl) and Residual Income The following data pertain to the Glengarry Division of Brown Company: Divisional contribution margin
QUESTION 3
Compute the Return on Investment (ROl) and Residual Income
The following data pertain to the Glengarry Division of Brown Company:
Divisional contribution margin | $ 700,000 |
Profit margin controllable by the divisional manager | 320,000 |
Profit margin traceable to the division | 294,400 |
Average asset investment | 1,280,000 |
The company uses responsibility accounting concepts when evaluating performance, and Glengarry's division manager is contemplating the following three investments. He can invest up to $400,000.
No. 1 | No. 2 | No. 3 | ||||
Cost | $250,000 | $300,000 | $400,000 | |||
Expected income | 50,000 | 54,000 | 96,000 | |||
Required:
- Calculate the ROIs of the three investments.
- Which of the three investments would be selected if the manager's focus is on Glengarry's divisional performance?Why?
- If Brown has an imputed interest charge of 22%, compute the residual income of investment no. 3. Is this investment attractive from Glengarry's perspective? From Brown's perspective? Why?
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