‘Problem 10.22 ROL, Residual Income, Behavioral Issues Jump Stast Company (ISO), «subsidiary of Mason Industries, manufactures go-certs and other ‘recreational vehicles. Family recreational centers that feature go-cart racks along with miniature golf, batting cages, and arcade games have increased in popularity. As a result, JSC has been pressured by Mascn management to diversify into some of these other recreational areas. [Recreational Leasing, Inc. (RL), onc af the largest firms leasing arcade games to these fam recreational centers, is looking fora friendly buyet. Mason’s top management believes that RLE's assets could be sequired for an investment of $3.2 million and has strongly urged Bill Gricco, division manager of JSC, to consider acquiring RLI. Bill has reviewed RLI's financial statements with his controller, Marie Donnelly, and they believe thatthe acquisition may not be in the bes iterest of JSC. “If we decide not to do this, the Msson people are not going 1 be happy.” said Bill." we could convince them to bsse our ‘bonuses on something other than return on investment, maybe this acquisition would look more attactive. How would we do ifthe bonuses were based ca residual income using the companys 15 percent cast of capital?” ‘Mason tes traditionally evaluated all of is divisions on the basis of return on investment, “which is defined asthe ratio of eperating income to total asses. The desired rate of return for each division Is 20 percent. The management eam of aay division reponing an annual increase in the return on investment is auommaticallyeligibie for a bonus. The management of divisions reporting a decline in the reuen on investment must provide convincing explanations forthe decline tobe eligible for abonus, ard this bonus is Himited to 50 percent of the bonus paid to divisions reporting an increase. ‘The following condensed financial statements are For both ISC and RL forthe fiscal year ended ‘May 31, 2007: SAO} mie] Salesreveme 1.S00,000, Leasing revenue 230.000 ‘Vaile expenses G.000,050)| —G.000,000) Fised experses {1.500.000} (1200.0) Operating income 3,000,000 60.000 ‘Caren sscte 3.300.000, 900,000 | Long-term gssets 05,700,000) ___ 1,100,000 | Total asets 000,000 3000,000 Caren ibis 100.000 $50,000 Long-term fab ities 3,800,000] 7,200,000, Stockholders” equ 800,000, 950,000 “Total ani and sneknokdes equity ‘£00,000 5.000.000 Required: 1. If Mason industries cantinues to use return on investment as the sale measure af division, performance, explain why JSC would be relustast to acquire RL. Re sure to support your answer with appropriate calculations.2.1f Mason Industies could be persuaded to use residual ircome to measure the performance of SC, explain why JSC would be more willing o acquire RLI. Be sure to support your answer ‘with appropriate calculations. 3. Discuss how ihe behavior of division managers is likely to be affected by the use of ‘a. Return on investment as a performance measure ’. Residual incomeas «performance measure. Penyeesaian 1. Jka Mason Industrige torus menggunakan ROI sebagai satu-satunya ukuran Kinerja divisi, ‘maka Jump Start Company (JSC) akan enggan memperoleh RLI karena akan menyebabkan ‘gabungan ROI semakin menurun. Aiungan: ROLISC ‘Operating Income / Avarage Operating Assets 2,000.000 / 8,060,000 25% ROIRLI Operating Income / Avarage Operating Assets 600,000 / 3.200.000" 1875% (2,000,000 + 600,000) (8,000,000 + 3,200,000) 2,4000000/ 11,200,000 =2321% * Perhatikan behwa biaya aset yang digunckan unuk RLI adalah biaya pasca-skuisisi '$3.200.000, bukan nilai pra-skuisisi aset Hal ini akan mengakibatkin manajer JSC ‘eilangan atau memilhi bonus terbatassampai dengan 50% dari jumlah yang memenut ayant, dengas asumsi bahwa manajemen bisa memberikan peajelasan yang meyakinkan, Untuk penururan RO! 2. Jka Mason Industries bisa dibujuk untuk menggunakan residual income untuk mengukur kinerja, JSC akan lebih bersecia untuk memperoleh RLI karena sisa pendapatan dari operasi ‘gabungan akan lebih besar dari sisa pendapetan untuk JSC ita sendis. Hitungan: JSC residual income Operating Income — (minum rate of return x Operating Asse) ‘2,000,000 (0.15 = $8,000,000) ‘$800,000 RLI residual income —_~ Operating Income ~ (minimum rate of return * Operating Asset) '$600,000 ~ (0.15 » $3,200,000) '$120000 Combined residual incame~ JSC residual income + RLU residual income ‘$800,000 + $120,000 = $920,000 5. Kemungkinan adanya pengaruh perilaku manajer dis ika Kineranya diukur dengen: 4. ROL yaitu melipusipertimbangan untuk menunda perbaikan modal atau modeenisas untuk ‘menghindari belanjamodal, dan menghindari peluane yang menguatuagkan atau investasyang akan menghaslban teh banyak dibandiaghan dergan bay sah, ‘Cap yang da enurntan RO lesdunan, Sens Oe Remealae b Reda ncone yas mel petinangan untuk mencai pean an investi yang akan mendapatian Iain besa dari target cnr ofp ae dan bane watt Imenguang set yang dignatan dalam bs.