The following financial data are for the evaluation of performance for Prairie Mining:
Average operating assets........................ $500,000
Net operating income.............................. $65,000
Minimum required rate of return .....................10%
Prairie Mining currently uses return on investment to evaluate investment centre managers. An accounting intern from the local university suggested to the controller that residual income may be a better performance measure.
REQUIRED
A. Calculate ROI for Prairie Mining.
B. Calculate residual income for Prairie Mining.
C. Write a brief memo to the controller, explaining why residual income is a better performance measure than ROI in this case.