Chapter 14 Solutions to Review Questions(1).pdf

Chapter 14 Solutions to Review Questions(1).pdf - Solutions...

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Solutions to Review Questions 14-1. Divisional income is relatively easy to compute because the data exist for financial reporting purposes. It is related to firm profit, which is of interest to the shareholders. It makes comparisons easier because it is a summary financial measure. Two disadvantages are that it is difficult to compare divisions that are different sizes and it does not include a measure of asset utilization. 14-2. The basic computations are the same. Because divisional income is not reported, the firm is free to specify certain accounting policies that might not be consistent with GAAP. In addition, depending on the decision authority of the manager, some accounts might be ignored or might be computed using firm-wide averages. 14-3. ROI-type measures adjust for size. In addition, ROI measures adjust for asset usage. 14-4. There are two common situations. First, managers might choose not to invest in worthwhile projects because the ROI is less than the target, even though the net present value is positive. Second, decisions made based on ROI depend on the current
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