EXERCISE 11–7 Contrasting Return on Investment and Residual Income [LO3, LO4] Ferris Ltd. of Australia has two divisions, one in Perth and one in Darwin. Selected data on the two divisions follow:
Perth
Darwin
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,000,000
$20,000,000
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
630,000
1,800,000
Average operating assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,000,000
10,000,000
Required:
1. Compute the ROI for each division.
2. Assume that the company evaluates performance using residual income and that the minimum required rate of return for any division is 16%. Compute the residual income for each division.
3. Is the Darwin Division’s greater residual income an indication that it is better managed? Explain.
