Question

Stenback Ceramics, a division of Berkner Corporation, has an operating income of $81,000 and total assets of $450,000. The required rate of retum for the company is 14%. The company is evaluating whether it should use return on investment (ROI) or residual income (R) as a measurement of performance for its division managers. The manager of Sterback Ceramics has the opportunity to undertake a new project that will require an investment of $150,000. This investment would earn $22.500 for the company Read the requirements Requirement 1. What is the original return on investment (ROI) for Stenback Ceramics (before making any additional investment)? First determine the formula to calculate the ROI 0 Requirements 1. What is the original return on investment (ROI) for Stenback Ceramics before making any additional investment? 2. What would the ROI be for Stenback Ceramics if this investment opportunity were undertaken? Would the manager of the Sterback Ceramics division want to make this investment if she were evaluated based on ROI? Why or why not? 3. What is the ROI of the investment opportunity would the investment be desirable from the standpoint of Berkner Corporation? Why or why not? 4. What would the residual income (RI) be for Stenback Ceramics if this investment opportunity were to be undertaken? Would the manager of the Stenback Ceramics division want to make this investment if she were evaluated based on RI? Why or why not? 5. What is the Ri of the investment opportunity? Would the investment be desirable from the standpoint of Berner Corporation? Why or why not? 6. Which performance measurement method, ROI or Ri, promotes goal congruence? Why? Print Done] Choose from any drop-down list and then click Check Answer 12 aning Clear All

Answer 1

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Part 1
Net Operating Income	a	$      81,000
Total Assets	b	$   450,000
ROI	a/b	18.00%
Part 2
		Existing	New	Total
Net Operating Income	a	$      81,000	$      22,500	$   103,500
Total Assets	b	$   450,000	$   150,000	$   600,000
ROI	a/b			17.25%
No, since new investment will reduce ROI from 18% to 17.25%
Part 3
Net Operating Income	a	$      22,500
Total Assets	b	$   150,000
ROI	a/b	15.00%
Yes, since ROI is more than required rate of return of 14%
Part 4
		Present	New	Total
Operating Assets		$   450,000	$   150,000	$   600,000
Minimum Required return rate		14%	14%	14%
Minimum Required operating income	b	$      63,000	$      21,000	$      84,000
Actual operaitng income	a	$      81,000	$      22,500	$   103,500
Residual Income	a-b	$      18,000	$        1,500	$      19,500