Home Healthy Sdn Bhd (HHSB) is a division that produces medical equipment for stay-athome patient. Currently, HHSB is evaluated based on return on investment. The desired rate
of return is 20%. Any divisions that reported an increase in ROI will automatically eligible for
yearly bonus. Those divisions reporting a decline in ROI must justify and provide reasonable
and convincing explanations in order to be eligible for bonus. However, the bonus is limited to
only 50% of the bonus paid to divisions reporting an increase in ROI.
Recently, Syarikat Sihat Sdn Bhd (SSSB), one of the largest companies in leasing medical
equipment is looking for a potential buyer. HHSB’s top management believed that SSSB’s
assets could be acquired for an investment of RM1,600,000 and thus has strongly urged the
division manager to consider acquiring SSSB.
The division manager reviewed the company financial statements and believed that the
acquisition may not be the best interest of his division. But, if he decides not to acquire SSSB,
the top management is not going to be happy. Thus, he plans to propose to the top management of HHSB to consider changing the bonus policy that based on residual income (RI) as the basis with the 15 percent cost of capital.
The following data are gathered from the financial statements of HHSB and SSSB for previous
year:
                                          HHSB(RM ‘000)  SSSB  (RM ‘000)
Sales                                        4,750              –
Leasing revenue                        –                  1,550
Variable expenses                    3,000             650
Fixed expenses                         750              600
Current assets                          1,150            950
Non-current assets                   2,850          550
Current liabilities                       700            425
Long-term liabilities               1,900            600
Equity stock                            1,400           475

(a) If HHSB continues to use ROI as a measure for divisional performance, explain why the
division manager is reluctant to acquire SSSB. Show your detail calculation.

(b) If HHSB use residual income as the measure for divisional performance, explain why the
division manager is more willing to acquire SSSB. Show your detail calculation