1. The company of Holman’s and Sons has manufactured hockey sticks for more than 10 years. In 2007, Holman’s acquired Leavitt’s Lumber, which supplies materials for the hockey sticks. Holman's designated its corporate headquarters as an investment center. In addition, Holman’s uses return on investment (ROI) to measure performance. Management bonuses are based in part on ROI. All investments are expected to earn a minimum rate of return of 15%.
Leavitt’s Lumber Company’s ROI has ranged from 17.2% to 19% since it was acquired. Leavitt’s had an investment opportunity in 2010 that had an estimated ROI of 16%. At the end of 2010, it was determined that Leavitt’s Lumber ROI for the year was 17%. Residual income for Leavitt’s Lumber in 2010 was $150,000.
As part of the management team at Leavitt’s Lumber, if you used ROI as the performance measure, would you have accepted the investment opportunity? If you had used residual income as the performance measure, would you have accepted the investment opportunity? Explain in detail your decision.
|Due By (Pacific Time)
||11/24/2014 07:17 pm