Question

Question 2' 1 pts Terry Lee is an investment center manager for XYZ Corp. and is evaluated solely on the return on investment for his division. Which of the following will improve Terry's evaluation? O Increasing the amount invested in assets while keeping operating income the same O Increasing the amount of operating income while keeping invested assets the same O Decreasing the amount invested in assets while keeping operating income the same Either borc

Answer 1

Performance of Terry Lee is to be evaluated on the basis of return on investment for his division. Any event which increases return on investment for his division, will improve his evaluation.

Return on investment is calculated as under:

Return on investment = Operating income/Invested assets

Return on investment will increase in the following situations:

- When operating income increases and there is no change in invested assets.

For example: Operating income = $10,000, Invested assets = $100,000

Return on investment = Operating income/Invested assets

= 10,000/100,000

= 10%

Suppose operating income increases to $12,000 but there is no change in invested assets. Return on investment will increase, calculated as under:

Return on investment = Operating income/Invested assets

= 12,000/100,000

= 12%

- When operating income remains same but there is a decrease in invested assets.

Suppose operating income remains at $10,000 but invested assets decrease to $80,000. Return on investment will increase, calculated as under:

Return on investment = Operating income/Invested assets

= 10,000/80,000

= 12.5%

Thus , fourth option is the correct option.

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