Review Exercises

1. Rochelle Company has just purchased a milling machine at a cost of $200,000. The machine is expected to generate operating income of $18,000 per year during its 10-year useful life. Rochelle uses the straight-line method of depreciation with a zero terminal disposal value.

Calculate ROI in the following situations:

a. First year using gross book value as the investment base.

b. Sixth year using gross book value as the investment base.

c. First year using net book value at the end of the year as the investment base.

d. Sixth year using net book value at the beginning of the year as the investment base.

2. The Kline Corporation manufactures pharmaceutical products in the U.S. and China. The operations are organized as decentralized divisions. The following information is available for 2010:

U.S. Division

China Division

Operating income

$2,400,000

11,400,000 yuan

Total assets

$16,000,000

75,000,000 yuan

The exchange rate at the time of Klines investment in China on December 31, 2009 was 7.5 Chinese yuan = $1 U.S. During 2010, the yuan declined steadily in value and the exchange rate on December 31, 2010, was 8.5 yuan = $1. The average exchange rate during 2010 was 8 yuan = $1.

a. Calculate the U.S. Divisions ROI for 2010 based on dollars.

b. Calculate the China Divisions ROI for 2010 based on yuan.

c. Which of Klines two divisions earned the better ROI in 2010? Explain your answer, complete with supporting calculations.

3. Endicott Inc. has four divisions. Each division produces and sells a variety of industrial products. The company is developing a compensation plan for the division managers. Three options are being considered: (a) salary, (b) a performance-based incentive using RI, (c) mix of salary and a performance-based incentive using RI. What factors should be considered in designing this plan?

(