01 Dec Comparing return on investment and residual income
Comparing return on investment and residual income Zimmerman Corporation operates three investment centers. The following financial statements apply to the investment center named Meier Division. Required a. Should operating income or net income be used to determine the rate of return (ROI) for the Meier investment center? Explain your answer. b. Should operating assets or total assets be used to determine the ROI for the Meier investment center? Explain your answer. c. Calculate the ROI for Meier. d. Zimmerman has a desired ROI of 8 percent. Headquarters has $300,000 of funds to assign to its investment centers. The manager of the Meier Division has an opportunity to invest the funds at an ROI of 10 percent. The other two divisions have investment opportunities that yield only 9 percent. Even so, the manager of Meier rejects the additional funding. Explain why the manager of Meier would reject the funds under these circumstances. e. Explain how residual income could be used to encourage the manager to accept the additional funds.