Chapter 11, Problem 6Q

To determine

Return On Investment (ROI) and Residual Income:

Return on Investment is calculated as Margin divided by Turnover. Here Margin refers to the Sales Margin and Turnover refers to the Capital Turnover Ratio.

In investment accounting, residual income is the income over the minimum expected rate of return or cost of capital. Hence residual income is calculated as Net Income for the year less the cost of capital.

To Discuss:

Why ROI as a performance measure for investment centers leads to bad decisions and how residual income approach overcomes this problem.