The Baxite Division of Mountain Corporation is an investment center. It has $4,000,000 of operating assets. During Year 1, the Baxite Division earned operating income of $720,000 on $12,000,000 of sales. Mountains companywide return on investment (ROI) is approximately 14 percent.

Required

a. Compute the ROI for the Baxite Division.

b. Calculate the two ratios into which ROI can be subdivided, margin and turnover, for the Baxite Division. What useful information can management gain by analyzing these two performance measures?

c. Assume Mountain uses ROI to rank managerial performance. The Baxite Division has the highest ROI in the company. Baxites nearest internal competitor is the Cadmium Division, which has an average ROI of 17 percent. Mountain needs to invest excess capital. The manager of the Baxite Division has the opportunity to expand existing capacity by investing an additional $4,000,000 in machinery. The expected ROI for the machinery investment is 15 percent. Should Baxites manager accept or reject the investment opportunity? Why?

d. Suppose Mountain changes its performance assessment measure from ROI to residual income (RI). Mountains desired rate of return is 14 percent. Under these circumstances, should Baxites manager accept or reject the opportunity to invest the additional $4,000,000 in machinery as described in requirement c?