Attley Inc.has three separate divisions: Division A,Division B,and Division C.Information about the three divisions follows:
$\begin{array}{lccc}
& \text { Division A } & \text { Division B } & \text { Division C } \
\text { Operating income } & \$ 26,750 & \$ 121,000 & \$ 22,400 \
\text { Average operating assets } & \$ 250,000 & \$ 412,000 & \$ 83,000
\end{array}$
The company has recently implemented a new performance evaluation system.Based on this new system,a division manager would only receive a bonus if the ROI of the division was greater than 25% and residual income was in excess of $20,000.If management uses a cost of capital rate of 18%,which division manager(s)would be eligible for a bonus?
A)Division A and Division B.
B)Division B and Division C.
C)Division A only.
D)Division B only.
E)None of the answer choices is correct.

Question

Attley Inc.has three separate divisions: Division A,Division B,and Division C.Information about the three divisions follows:
$\begin{array}{lccc} 
& \text { Division A } & \text { Division B } & \text { Division C } \
 \text { Operating income } & \$ 26,750 & \$ 121,000 & \$ 22,400 \
\text { Average operating assets } & \$ 250,000 & \$ 412,000 & \$ 83,000
\end{array}$
The company has recently implemented a new performance evaluation system.Based on this new system,a division manager would only receive a bonus if the ROI of the division was greater than 25% and residual income was in excess of $20,000.If management uses a cost of capital rate of 18%,which division manager(s)would be eligible for a bonus?
A)Division A and Division B.
B)Division B and Division C.
C)Division A only.
D)Division B only.
E)None of the answer choices is correct.

Quizplus · Accepted Answer

First, calculate the ROI and residual income for each division:- **ROI** is calculated as Operating Income / Average Operating Assets.- **Residual Income** is calculated as Operating Income - (Average Operating Assets * Cost of Capital Rate).**Division A:**- ROI = $26,750 / $250,000 = 10.7%- Residual Income = $26,750 - ($250,000 * 18%) = $26,750 - $45,000 = -$18,250**Division B:**- ROI = $121,000 / $412,000 = 29.37%- Residual Income = $121,000 - ($412,000 * 18%) = $121,000 - $74,160 = $46,840**Division C:**- ROI = $22,400 / $83,000 = 27%- Residual Income = $22,400 - ($83,000 * 18%) = $22,400 - $14,940 = $7,460Only Division B has both an ROI greater than 25% and residual income in excess of $20,000.

Attley Inc The Company Has Recently Implemented a New Performance Evaluation System