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A company has two divisions.The divisions are identical in terms of the number and type of machines they have and the operations they carry out. However, one division was set up four years ago and the other was set up one year ago. Head office appraises the division using both ROI and RI
which of the following is correct in relation to the outcome of the appraisal for each division?
A)Both ROI and RI will favor the older division
B)ROI will favor the older division but RI will treat each fairly
C)RI will favor the newer division and ROI will favour the older division
D) BOth RI and ROI will facor the newer divisionthe answer A
I thought that using ROI in older division might have a manipulation because the division might underestimate fixed assets and therefore it is useful using it in newer one
I also thought that RI might be useful using in older division because there is also manipulation but there is lowest risk.
Dear Tutor what do you think?
The question is not asking which is the best method to use for each division.
It is asking which division will have the highest ROI and which division will have the higher RI.
Given that both divisions will have the same profits but the older division will have lower net assets (because the machines will have been depreciated more) then the older division will have a higher ROI and a higher RI.
Have you looked at the figures the examiner has used at the end of the explanation to illustrate this?
Your explanation is better their explanation.brief and concise understood Dear tutor.
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