Chapter 10, Problem 12Q

To determine

Concept introduction:

Return on investment (ROI):

Return on investment is a profitability ratio that represents the percentage return on the investment made. It is calculated by dividing the Net Income by the Average total assets. The formulas to calculate the ROI are as follows:

$ROI =\frac{OperatingIncome}{Averagetotalassets}$

Residual Income (RI):

Residual Income is the income earned over and above the expected rate of return on assets invested in the business. The formulas to calculate the Residual Income is as follows:

$ResidualIncome=OperatingIncome–\left(Averageassets\times RequiredrateorReturn\right)$

To indicate:

The benefit of using Residual Income over ROI for performance evaluation