Chapter 11 Segment Reporting, Transfer Pricing, and Balanced Scorecard 427 ROI a

Question

Chapter 11 Segment Reporting, Transfer Pricing, and Balanced Scorecard 427 ROI and Residual Income: Impact of a New Investment The Stallion Division of Motortown Motors had an operating income of $675,000 and net assets of s2.700,000. Motortown Motors has a target rate of return of 23 percent. LO3 Required a. Compute the return on investment. b. Compute the residual income. The Stallion Division has an opportunity to increase ope $675,000 investment in assets. 1. Compute the Stallion Division's return on investment if the project is undertaken. (Rund c. rating income by $100,000 with an answer to three decimal places.) C 2. omp pute the Stallion Division's residual income if the project is undertaken

Explanation / Answer

a) Return on investment (ROI) =Net income ÷ Net assets

Net income = 675000

Net assets =2700000

ROI =675000÷2700000=.25 OR 25%

b) Residual income (RI) = Net income -Desired Net income

Net income = 675000

Desired net income = Net assets x target rate of return

=2700000×.23=621000

RI = 675000-621000=54000

c)

1) new Operating income =675000+100000=775000

New net assets =2700000+675000=3375000

new ROI = 775000÷3375000=.22962 or 22.962%

2)new net income = 675000+100000=775000

New desired income = 3375000×.23 =776250

RI = 775000-776250=-1250

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