Question

1. Enteritis Farms grows gourmet vegetables for the bon vivant and old-hippie markets. It has three divisions. Performance of those divisions for the most recent period are listed below. The performance in that period is indicative of normal performance.

Division	Operating Income	Assets Invested	Return on Investment
Enoki	$180,000	$1,000,000
Pingtung	120,000	800,000
Burdock	45,000	600,000
Total	$325,000	$2,600,000

Required:

-Determine the return on investment for each of the divisions and for the company as a whole.

-Assume that the division managers are all evaluated based primarily on ROI. Enoki has the opportunity to invest in additional project that will return $56,000 for an investment of $400,000. Is Enoki likely to make the investment?

-Assume Burdock has the opportunity to make the same investment described above. Is it likely to make the investment?

-Explain who using ROI as the primary evaluation tool can result in adverse consequences for the company as a whole.

-How does the residual income measure overcome some of the problems associated with ROI?

-ROI and RI both use accounting information. Explain why accounting numbers used in these calculations should be questioned and adjusted

Answer 1