Determine the higher ranked division using residual income, Ask an Expert

Accounting

The following data pertain to two divisions Western and Eastern, of a large corporation. This corporation was established on the East Coast of the United States. It has recently expanded to the West Coast to take advantage of the greater profit potential in the growing western states.

Eastern Western
Profit $3,000,000 $780,000
Investment $24,000,000 $3,900,000

a. Determine the higher ranked division using residual income (with cost of capital at 10%) as the criterion.

b. Repeat the exercise in part (a), but using ROI as the criterion.

c. How do you explain the conflicting results in part (a) and (b)?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9416526

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