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CPA-08299: Managers of the Doggie Food Co. want to add a bonus component to their compensation plan. They are trying to decide between return on investment (ROI) and residual income (RI) as the performance measure they will use. If Doggie adopts the RI performance measure, the relevant required rate of return would be 18%. One segment of Doggie is the Good Treats division, where the manager has invested in new equipment. The operating results from this equipment are as follows:
Revenues $ 80,000
Cost of goods sold 45,000
General and administrative expenses 15,000
Assuming that there are no income taxes, what would be the ROI and RI for this equipment that has an average value of $100,000?
ROI RI
Answer:
ROI = 20% and RI = $2000
Explanation:
Return On Investment(ROI) = Profit before Interest & Tax/Average Investment
Profit before Interest & Tax (PBIT) = Revenue -cost of goods sold- General & Adm expenses
PBIT= $ 80,000
- $45,000
-$15,000
= $20,000
ROI = ($20,000/100,000) * 100% = 20%
Residual Income = PBIT - (Average Investment* Required Rate of Return)
=$20,000- (18%* 100,000)
=$20,000- $18,000
= $2000
Answer:
Option (D) is correct.
Explanation:
Selling amount of equipment = $80,000
Purchasing price 2 years ago = $75,000
Depreciation expense = $20,000
Gain(Loss) = Cash proceeds - Book value
= $80,000 - ($75,000 - $20,000)
= $80,000 - $55,000
Capital gain = $25,000
Therefore, the amount and character of Bozeman's gain is $25,000.
The cost of electricity. <span> because explicit costs are like accounting costs. They are direct costs that come with operating a business. A,B and C are all implicit costs, they are like opportunity costs and do not have any direct value in a accounting perspective.</span>
Answer:
Division XYZ has the highest residual income
Explanation:
Residual income is the excess of the controllable profit over the opportunity cost of capital invested.
It is used to appraise and evaluate the performance of separate divisions of the same company where different managers are responsible for each
It is computed as follows:
Residual income = Controllable profit - (cost of capital× operating assets)
<em>Division ABC</em>
Residual income = 200,000 - (10%×750,000) = $125,000
Residual income= $125,000
<em />
<em>Division XYZ</em>
Residual income = 210,000 - (10% ×800,000) = $130
,000
Residual income= $130,000
Division XYZ has a higher residual income of $130,000 compared to the $125,000 of division ABC. A difference of $5,000 higher.
