Net operating income average operating assets

Discussion Question Two:

Decentralized businesses can have three responsibility centers that must be evaluated differently because of their functions.

Describe the three responsibility centers and give an example of each from your work.
Give an explanation about how each is evaluated.
Tell us why you would prefer to work in a centralized or decentralized organization.
Discuss which type of responsibility center you would prefer to manage and why.

Return on Investments (ROI) Return on Investment (ROI). Cost and segment reporting can be important areas to measure management performance with, but this is not enough to evaluate the investment manager's performance. There are a couple of methods to do this effectively and they include a return on investment, ROI formula and residual income. The ROI formula is return on investment equal net operating income/average operating assets. Net operating income is income before taxes and interest. Average operating assets include cash, accounts receivable, inventory and property, plant and equipment as well as other assets used in operations. We can expand the ROI formula out to give us more pieces and the ability to identify problem areas we can improve. An example would be ROI equal net operating income/sales times sales/average operating assets. This will help us more easily see what needs to be fixed. The higher the ROI number, the better. So, management will strive to have this income as high as possible and often will examine this ratio before decisions are finalized. If the ROI doesn't increase because of the proposal, it makes it much harder to justify. Also, we call the first formula the margin, and the second formula the turnover. Residual income is another measure to evaluate segment's performance. This measure motivates managers to look for profitable investments that will be rejected based on ROI. Residual income equal net income minus average operating assets times minimum required rate of return. This method doesn't necessarily discourage management from making new investment decisions. We are just looking at how much they exceed our expected minimum return.