Question

Gable ​Ceramics, a division of Alderman ​Corporation, has an operating income of $ 64 comma 000 and total assets of $ 400 comma 000. The required rate of return for the company is 11​%. The company is evaluating whether it should use return on investment​ (ROI) or residual income​ (RI) as a measurement of performance for its division managers. The manager of Gable Ceramics has the opportunity to undertake a new project that will require an investment of $ 100 comma 000. This investment would earn $ 14 comma 000 for the company.

Answer 1

Answer:

The question is meant to compare the original ROI and RI before the investment compared to the new investment is ROI and RI

The new investment has a lower return on investment of 11% compared to original 14%

However,the project should be considered since it has $3000 residual income in additional to the original residual income

Explanation:

The return on investment and residual income before the new investment are computed thus:

return on investment=operating income/total assets=$64,000/$400,000=16%

residual income=operating income-(total assets*rate of return)

                         =$64,000-($400,000*11%)=$20,000

Thereafter,the return on investment and residual income on the new investment are computed thus:

return on investment=operating income/total assets=$14,000/$100,000=14%

residual income=operating income-(total assets*rate of return)

                         =$14,000-($100,000*11%)=$3,000