a. How would the divisions be ranked if the evaluation were based on net income?

Question

a. How would the divisions be ranked if the evaluation were based on net income?

b. How would the divisions be ranked if the evaluation were based on ROI? (Round answers to 2 decimal places, e.g. 15.25%.)

c. How would the divisions be ranked (from best to worst performance) if the evaluation were based on residual income? (Round calculations and final answer to 0 decimal places, e.g. 5,025.)

Residual Income Rank
Division A $ _________ _______
Division B $ _________ ________
Division C $ _________ ________

Top management of the Gates Corporation is trying to construct a performance evaluation system to use to evaluate each of its three divisions. This past year’s financial data are as follows:
Division A Division B Division C Total assets $942,000 $18,710,000 $11,150,000 Noninterest-bearing current liabilities 50,700 2,160,000 1,067,000 Net income 197,000 1,818,000 1,343,000 Interest expense 50,700 1,934,000 1,248,000 Tax rate 40% 40% 40% Required rate of return 10% 12% 14%

a. How would the divisions be ranked if the evaluation were based on net income?

b. How would the divisions be ranked if the evaluation were based on ROI? (Round answers to 2 decimal places, e.g. 15.25%.)

Division A Division B Division C ROI   % %   %

has the highest ROI, followed by and then .

c. How would the divisions be ranked (from best to worst performance) if the evaluation were based on residual income? (Round calculations and final answer to 0 decimal places, e.g. 5,025.)

Residual Income Rank
Division A $ _________ _______
Division B $ _________ ________
Division C $ _________ ________

Explanation / Answer

a)

B)

Rank Division 1 B   (1818000) 2 C (1343000) 3 A   (197000)

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