Name: Jannah Mae A. Nene
Course and Year: BSA-2
Subject: ACCTG233
Date: October 8, 2020
Deadline of submission: October 9, 2020 at 3:30 PM thru LMS Moodle or email [email protected]
Topic 11 – Management Control and Strategic Performance Measurement
Exercise 1 (Evaluation of an Investment SBU)
The Cling Division has the following operating data:
Operating assets P400,000
Operating income 100,000
Minimum required rate of return 16%
Required:
(1) Compute the ROI and RI for this division
(2) Assume that the Cling Division is presented with an investment product yielding a 20 percent
return on its investment requiring a cash outlay of P60,000. Would the manager of the Cling
Division accept this investment under the ROI approach? How about under the RI approach?
Requirement 1
ROI RI
Operating Assets P400,000 P400,000
Operating Income P100,000 P100,000
ROI (P100,000P400,000) 25%
Minimum required income
(16% x P400,000) P64,000
RI (P100,000 - P64,000) P36,000
Requirement 2
The manager of the Cling Division would not accept this project under the ROI approach since
the division is already earning 25%. Accepting this project would reduce the present divisional
performance, as shown below:
Present New Project Overall
Operating assets P400,000 P60,000 P460,000
Operating income P100,000 P12,000* P112,000
ROI 25% 20% 24.35%
* P60,000 x 20% = P12,000
Under the RI approach, on the other hand, the manager would accept this project since the new
project provides a higher return than the minimum required rate of return (20 percent vs. 16 percent). The
new project would increase the overall divisional residual income, as shown below:
Present New Project Overall
Operating assets P400,000 P60,000 P460,000
Operating income P100,000 P12,000* P112,000
Minimum required
return at 16% 64,000 9,600* 73,600
RI P 36,000 P 2,400 P 38,400
* P60,000 x 16% = P9,600
