Selected Data for Two Divisions of the Ramble Company Are

question 4

Essay

Selected data for two divisions of the Ramble Company are given below:
$\begin{array}{lll}&\text { South Division }&\text { North Division }\\\text { Net sales } & \$ 4,000,000 & \$ 7,000,000 \\\text { Average total assets } & \$ 2,000,000 & \$ 2,000,000 \\\text { Net operating income after taxes } & \$ 360,000 & \$ 420,000 \\\text { Average plant assets } & \$ 950,000 & \$ 800,000 \\\text { Average cost of capital } & 10 \% & 12 \%\end{array}$
Each division is considering a capital investment of $1,000,000.The annual return on the capital investment is 11%.Invested capital is defined as total assets.
Required:
A) The South Division's manager is evaluated using residual income. Should South Division accept the capital investment? Why?
B) The North Division's manager is evaluated using residual income. Should North Division accept the capital investment? Why?
C) The South Division's manager is evaluated using return on investment. Should South Division accept the capital investment? Why?

• A) The South Division's manager is evaluated using residual income. Should South Division accept the capital investment? Why?
• B) The North Division's manager is evaluated using residual income. Should North Division accept the capital investment? Why?
• C) The South Division's manager is evaluated using return on investment. Should South Division accept the capital investment? Why?

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Definitions:

Due Diligence

The investigation or exercise of care that a reasonable business or person is expected to take before entering into an agreement or transaction with another party.

Short-termism

A tendency to prioritize immediate gains over long-term objectives and benefits.

Sustainable Activities

Actions and practices that do not deplete resources or harm natural cycles, ensuring long-term environmental balance.

Shareholders

Individuals or entities that own shares in a corporation, making them partial owners of the company with rights to dividends and voting in corporate matters.