Hannant Corporation operates three investment centers. The following financial statements apply to the investment center named Abacon Division.

Required

a. Should operating income or net income be used to determine the rate of return (ROI) for the Abacon investment center? Explain your answer.

b. Should operating assets or total assets be used to determine the ROI for the Abacon investment center? Explain your answer.

c. Calculate the ROI for Abacon.

d. Hannant has a desired ROI of 12 percent. Headquarters has \($100,000\) of funds to assign its investment centers. The manager of the Abacon division has an opportunity to invest the funds at an ROI of 15 percent. The other two divisions have investment opportunities that yield only 14 percent. Even so, the manager of Abacon rejects the additional funding. Explain why the manager of Abacon would reject the funds under these circumstances.

e. Explain how residual income could be used to encourage the manager to accept the additional funds.

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ABACON DIVISION Income Statement For the Year Ended December 31, 2006 Sales Revenue $91,285 Cost of Goods Sold (59,620) Gross Margin 31,665 Operating Expenses Selling Expenses (1,445) Depreciation Expense (1,200) Operating Income 29,020 Nonoperating Expense Gain on Sale of Land 4,180 Net Income $33,200