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.

 

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