The following data pertain to the Eastern Division of Cairo Company:

Divisional contribution margin $500,000

Profit margin controllable by the divisional manager 200,000

Profit margin traceable to the division 180,000

Average asset investment 600,000

Management bonuses are based on ROI, and the company uses responsibility accounting concepts when evaluating performance. Eastern divisions manager is contemplating the following three investments. He can invest up to $300,000.

No. 1 No. 2 No. 3 Cost $160,000 $200,000 $300,000 Expected income 40,000 34,000 84,000

Required:

A. Calculate the ROIs of the three investments.

B. What is the division managers current ROI, computed by using responsibility accounting concepts?

C. Which of the three investments should the manager select? Why?

D. If Cairo Company has an imputed interest charge of 20%, compute the residual income of investment no. 3. Is this investment attractive from Eastern Divisions perspective? From Cairo Companys perspective? Why?

E. Does the companys bonus plan encourage the most effective investment policy for Cairo Company? Briefly explain and, if appropriate, tell how the plan could be improved.