Case 2: Residual Income John is the manager of a production division in ABC Company. ABC Company evaluates John’s performance using the ROI of his division, which is the basis of John’s bonus. If ROI...

Case 2: Residual Income

John is the manager of a production division in ABC Company. ABC Company evaluates John’s performance
using the ROI of his division, which is the basis of John’s bonus. If ROI is maintained or increased, John’s bonus
will be 1% of the net operating income. If your ROI decreases, John will not receive any bonus.
John’s division currently has an average operating asset of P120,000, and the net operating income of your
division is P30,000. Now, John is considering purchasing a new machine that would cost P40,000 and yield an
additional net operating income of P5,000 to John’s division.

Required: Will John approve the purchase of the machine? Will the Company benefit from this acquisition?
To answer this question, you need to:

1. Compute for the ROI of the division (before and after the acquisition)
2. Compute for Residual income of the division (before and after the acquisition)