Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 28

Impact of an Asset Disposal on Performance Measures

Refer to the facts in Exercise 14-27, but assume that Noonan has been leasing the machine for $40,000 annually. Assume also that the machine generates income of $28,000 annually after the lease payment. Noonan can cancel the lease on the machine without penalty at any time.

Required

a. Noonan computes ROI using beginning-of-the-year net assets. What will the divisional ROI be for year 1 assuming Noonan retains the asset?

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b. What would divisional ROI be for year 1 assuming Noonan disposes of the asset?

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c. Noonan computes residual income using beginning-of-the-year net assets. What will the divisional residual income be for year 1 assuming Noonan retains the asset?

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d. What would divisional residual income be for year 1 assuming Noonan disposes of the asset for its book value (there is no gain or loss on the sale)?

Step 1 of 4

(20 min.)?Impact of New Asset on Performance Measures: Noonan Division.

a.?ROI before disposal:

$330,000	= 16.5%
$2,000,000