olomon Corporation operates three investment centers. The following financial statements apply to the investment center named Bowman Division. BOWMAN DIVISION Income State
Solomon Corporation operates three investment centers. The following financial statements apply to the investment center named Bowman Division.
| BOWMAN DIVISION | |||
| Income Statement | |||
| For the Year Ended December 31, Year 2 | |||
| Sales revenue | $ | 107,280 | |
| Cost of goods sold | 58,875 | ||
| Gross margin | 48,405 | ||
| Operating expenses | |||
| Selling expenses | (2,680 | ) | |
| Depreciation expense | (4,135 | ) | |
| Operating income | 41,590 | ||
| Nonoperating item | |||
| Loss on sale of land | (4,000 | ) | |
| Net income | $ | 37,590 | |
| BOWMAN DIVISION | |||
| Balance Sheet | |||
| As of December 31, Year 2 | |||
| Assets | |||
| Cash | $ | 12,532 | |
| 40,316 | |||
| Merchandise inventory | 36,900 | ||
| Equipment less |
90,288 | ||
| Nonoperating assets | 9,600 | ||
| Total assets | $ | 189,636 | |
| Liabilities | |||
| Accounts payable | $ | 9,447 | |
| Notes payable | 67,000 | ||
| Common stock | 70,000 | ||
| 43,189 | |||
| Total liabilities and stockholder's equity | $ | 189,636 | |
Required
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Calculate the ROI for Bowman.
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Solomon has a desired ROI of 13 percent. Headquarters has $96,000 of funds to assign to its investment centers. The manager of the Bowman Division has an opportunity to invest the funds at an ROI of 15 percent. The other two divisions have investment opportunities that yield only 14 percent. Calculate the new ROI for Bowman division, if the investment opportunity is adopted by Bowman.
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Based on the original data, calculate the original residual income. Also, calculate the new residual income based on information provided in Requirement d.
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