The ArtMart Company has three divisions: X Division, Y Division, and Z Division. Operating results for the three divisions for last year were as follows:
$\begin{array}{lr}
& \text { Division X }& \text { Division Y }& \text { Division Z}\
\text { Residual income } & \$ 8,400 &\$27,200&\$2,000\
\text { Net operating income } & 188,600&115,600&52,000 \
\text { Average operating } & \
\text { assets } & 820,000 &680,000&400,000\
\text { Sales } & 1,640,000 &1,445,000&1,040,000\
\text { Profit margin } & 11.5 \%&8.0\%&5.0\%
\end{array}$
Corporate headquarters is offering an investment opportunity to each of the divisions. The opportunity will yield an operating income of $35,000, based on an average operating investment of $246,000.
Required:
a. If the divisions are being evaluated using return on investment (ROI), what will be the decision (accept or reject) of each division regarding this opportunity? Support your answer with the appropriate calculations.
b. If the divisions are being evaluated using residual income, what will be the decision (accept or reject) of each division regarding this opportunity? Support your answer with the appropriate calculations.

Question

The ArtMart Company has three divisions: X Division, Y Division, and Z Division. Operating results for the three divisions for last year were as follows:
 $\begin{array}{lr} 
& \text { Division X }& \text { Division  Y }& \text { Division Z}\
\text { Residual income } & \$ 8,400 &\$27,200&\$2,000\
\text { Net operating income } & 188,600&115,600&52,000 \
\text { Average operating } & \
\text { assets } & 820,000 &680,000&400,000\
\text { Sales } & 1,640,000 &1,445,000&1,040,000\
\text { Profit margin } & 11.5 \%&8.0\%&5.0\%
\end{array}$ 
Corporate headquarters is offering an investment opportunity to each of the divisions. The opportunity will yield an operating income of $35,000, based on an average operating investment of $246,000.
Required:
a. If the divisions are being evaluated using return on investment (ROI), what will be the decision (accept or reject) of each division regarding this opportunity? Support your answer with the appropriate calculations.
b. If the divisions are being evaluated using residual income, what will be the decision (accept or reject) of each division regarding this opportunity? Support your answer with the appropriate calculations.

Quizplus · Accepted Answer

The Answer of The ArtMart Company has three divisions: X Division, Y Division, and Z Division. Operating results for the three divisions for last year were as follows:
 $\begin{array}{lr} 
& \text { Division X }& \text { Division  Y }& \text { Division Z}\
\text { Residual income } & \$ 8,400 &\$27,200&\$2,000\
\text { Net operating income } & 188,600&115,600&52,000 \
\text { Average operating } & \
\text { assets } & 820,000 &680,000&400,000\
\text { Sales } & 1,640,000 &1,445,000&1,040,000\
\text { Profit margin } & 11.5 \%&8.0\%&5.0\%
\end{array}$ 
Corporate headquarters is offering an investment opportunity to each of the divisions. The opportunity will yield an operating income of $35,000, based on an average operating investment of $246,000.
Required:
a. If the divisions are being evaluated using return on investment (ROI), what will be the decision (accept or reject) of each division regarding this opportunity? Support your answer with the appropriate calculations.
b. If the divisions are being evaluated using residual income, what will be the decision (accept or reject) of each division regarding this opportunity? Support your answer with the appropriate calculations.

The ArtMart Company Has Three Divisions: X Division, Y Division