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:

1. Calculate the ROIs of the three investments.

1. Which of the three investments would be selected if the manager's focus is on Glengarry's divisional performance?Why?

1. 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?