Problem 1-

ROI vs. Residual Income Using Different Asset Measures

Top management is trying to determine a consistent, but fair, valuation system to use to evaluate each of its four divisions. This year's performance data are summarized as follows:

Required:

Note: Only one division is awarded a bonus each year.

A. Which division would earn a bonus if top management used ROI based on operating assets?

B. Which division would earn a bonus if top management used ROI based on operating assets minus current liabilities?

C. Which division would earn a bonus if top management calculated residual income on the basis of operating assets with a minimum return of 12 percent?

D. Which division would earn a bonus if top management calculated residual income on the basis of operating assets minus current liabilities with a minimum return of 12 percent?