Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 66

Investment center analysis; ROI and residual income Milano Corporation has three operating divisions and requires a 12% return on all investments. Selected information is presented here:

	Division A	Division B	Division C
Revenues	$500,000	?	?
Operating income	$ 60,000	?	$80,000
Operating assets	$250,000	$600,000	?
Margin	?	12%	?
Turnover	?	1 turn	2 turns
ROI	?	?	?
Residual income	?	?	$20,000

Required:

a. Calculate the missing amounts for each division.

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b. Comment on the relative performance of each division.

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c. Provide an example to show how residual income improves decision making at the divisional level.

Step 1 of 6

Investment center analysis, ROI, Residual income, and DuPont Performance Analysis:

Investment center analysis : In this method of analysis, companies estimate the results (profits) of an investment center (corporate headquarters) according to the revenues it gets in through investments within capital assets balanced to the whole expenses. The two important tools of an investment center are (a) ROI and (b) residual income of the investment.

ROI: It is a performance measure tool used to estimate the effectiveness of an investment or to check the competency of a particular investment with a numeral of different investments.

Residual income : The residual income refers to the amount of income that one has rest after paying all personal debts and the mortgage amount.