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Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins
Edition 5ISBN: 0073526940Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins
Edition 5ISBN: 0073526940Return on Investment (ROI) and Residual Income (RI) Consider the following data (in millions) from Midwest Financial, Inc., which has two main divisions: mortgage loans, and consumer loans:
| Mortgage Loans | Consumer Loans |
Average total assets | $2,000 | $20,000 |
Operating income | $400 | $2,500 |
ROI | 20% | 12.5% |
Required
1. Based on ROI, which division is more successful? Why?
2. Midwest uses RI as a measure of the financial performance of its divisions. What is the residual income (RI) for each division if the minimum desired rate of return is: (a) 10 percent, (b) 15 percent, and (c) 20 percent? Which division is more successful under each of these rates?
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The formula for calculating residual return RI is as follows:
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