Problem 9-20A

a. Operating income, instead of net income, should be used to

determine the ROI for the Kent investment center because
operating income is a better measurement of Kent’s operating
performance. Net income may include gains, losses, or non-
operating expenses that do not reflect Kent’s performance
consistently.

b. Operating assets, instead of total assets, should be used to

determine the ROI for the Kent investment center because
operating assets is a better measurement. Total assets may
include assets that are not used in operation, thus causing
the denominator of ROI to be misleading.

c. Operating assets = Total assets – Non-operating assets

Operating assets = $183,790 – $9,000 = $174,790
Operating income ÷ Operating assets = ROI
$29,020 ÷ $174,790 = 16.60%

d. If ROI is the only performance measure for Kent’s

performance, the new investment would hurt Kent’s manager
if the new ROI decreases. Kent’s return on the new
investment opportunity is 15%, lower than the current ROI,
which will drag the original ROI down, thus hurting Kent’s
performance measure. Further computation follows.
Problem 9-20A (continued)

Income from New Investment = $100,000 x 15% = $15,000

New Operating income = $29,020 + $15,000 = $44,020
New Operating assets = $174,790 + $100,000 = $274,790
New ROI = $44,020 ÷ $274,790 = 16.02%

e. If Slatten’s objective is profit maximization, residual income

(RI), rather than ROI can measure operating performance to
reflect that objective better. Further computation follows.

Original RI = $29,020 – $174,790 x 12% = $8,045.20

New RI = $44,020 – $274,790 x 12% = $11,045.20
If Slatten uses RI, instead of ROI, for performance evaluation,
the manager would receive a better evaluation and reward.
Consequently, the manager would be encouraged to pursue
the company’s objectives, rather than personal objectives.