Finley is the Manager of the "Funky" division at ABC, Inc. Finley's bonus increases as Funky's ROI Increases. ABC, Inc. currently has a required rate of return of 12%. Here is information for Funky division: Net Operating Income: $150,000 Residual Income: $50,000 Average Assets: $1,000,000 Finley has the opportunity to invest in a new project for Funky that has the following pata: Average operating assets $ 125,000 Total liabilities $ 50,000 Sales $ 300,000 Contribution margin $ 75,000 Net operating income $ 15,000 Given the above information and Finley's Incentive structure: (1) is Finley likely to accept or reject the project, and (2) Does ABC, Inc. want Finley to accept or reject the project? Given the above information and Finley's Incentive structure: (1) is Finley likely to accept or reject the project, and (2) Does ABC, Inc. want Finley to accept or reject the project? O (1) Finley Reject; (2) ACB, Inc. Reject O (1) Finley Accept: (2) ACB, Inc. Reject O (1) Finley Reject; (2) ACB, Inc. Accept O (1) Finley Accept; (2) ACB, Inc. Accept

Finley is the Manager of the "Funky" division at ABC, Inc. Finley's bonus increases as Funky's ROI Increases. ABC, Inc. currently has a required rate of return of 12%. Here is information for Funky division: Net Operating Income: $150,000 Residual Income: $50,000 Average Assets: $1,000,000 Finley has the opportunity to invest in a new project for Funky that has the following pata: Average operating assets $ 125,000 Total liabilities $ 50,000 Sales $ 300,000 Contribution margin $ 75,000 Net operating income $ 15,000 Given the above information and Finley's Incentive structure: (1) is Finley likely to accept or reject the project, and (2) Does ABC, Inc. want Finley to accept or reject the project? Given the above information and Finley's Incentive structure: (1) is Finley likely to accept or reject the project, and (2) Does ABC, Inc. want Finley to accept or reject the project? O (1) Finley Reject; (2) ACB, Inc. Reject O (1) Finley Accept: (2) ACB, Inc. Reject O (1) Finley Reject; (2) ACB, Inc. Accept O (1) Finley Accept; (2) ACB, Inc. Accept

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter10: Evaluating Decentralized Operations

Section: Chapter Questions

Problem 18E

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Banyan Industries has two divisions, a tax rate of 30%, and a minimum rate of return of 20%. Division A has a weighted average cost of Capital of 9.5% and is looking at a new project that will generate a profit of $1,200,000 from a machine that costs $4,000,000. Division B has a weighted average cost of capital of 9.5% and is looking at a new project that will generate a profit of $1,350,000 from a machine that costs $5,000.000. A. Calculate the EVA for each of Banyans divisions. B. Calculate the RI for each of Banyans division. C. If Banyan uses EVA to evaluate the projects, which division has the better project and by how much? D. If Banyan uses RI, which division has the better project and by how much? E. What are some of the reasons for the similarity or difference that you found in the use of EVA versus RI?
Keleher Industries manufactures pet doors and sells them directly to the consumer via their web site. The marketing manager believes that if the company invests in new software, they will increase their sales by 10%. The new software will increase fixed costs by $400 per month. Prepare a forecasted contribution margin income statement for Keleher Industries reflecting the new software cost and associated increase in sales. The previous annual statement is as follows:
Lucas is the X Division manager and his performance is evaluated by executive management based on Division ROI. The current controllable margin for X Division is P46,000. Its current operating assets total P210,000. The division is considering purchasing equipment for P40,000 that will increase sales by an estimated P20,000, with annual depreciation of P10,000. If the equipment is purchased, what is the new ROI (round-off the final answer to one decimal places)?
Mr. Sy is the general manager of the XXX Division, and his performance is measured using the residual income method. Mr. Sy is reviewing the following forecasts to his division for the next year:Category AmountsWorking Capital P 1,800,000Revenue 30,000,000Plant and Equipment 17,200,000If the imputed interest charge is 15% and Mr. Sy wants to achieve a residual income of P2,000,000 what will costs (total expenses) have to be in order to achieve the targeted residual income?
Hemisphere, LLC is planning to outsource its 51-person information technology (IT) department to Dyonyx. Hemisphere’s president believes this move will allow access to cutting-edge technologies and skill sets that would be cost prohibitive to obtain on its own. If it is assumed that the loaded cost of an IT employee is $100,000 per year and that Hemisphere will save 25% of this cost through outsourcing, determine the present worth of the total savings for a 5-year contract at an interest rate of 6% per year, compounded monthly
The New York Division of Ram Co. currently earns an ROI of 18%. The department manager is considering a new project, which requires a $100,000 investment in operating assets and generates a net operating income of $16,000. Assume that the company’s minimum required rate of return is 14%. Which of the following statement is true? a)If the manager is evaluated based on ROI, she will make the new investment because it increases the department’s ROI by 2%. b)If the manager is evaluated based on ROI, she will make the new investment because it generates an ROI that is 2% greater than the company’s minimum required rate of return. c)If the manager is evaluated based on residual income, she will make the new investment because it increases the department’s residual income by $2,000. d)If the manager is evaluated based on residual income, she will not make the new investment because it decreases the department’s residual income by $2,000.
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $5,800,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales $ 5,100,000 Variable expenses 2,280,000 Contribution margin 2,820,000 Fixed expenses: Advertising, salaries, and otherfixed out-of-pocket costs $ 870,000 Depreciation 1,160,000 Total fixed expenses 2,030,000 Net operating income $ 790,000 Required: 1. What is the project’s net present value? 2. What is the project’s internal rate of return to the nearest whole percent? 3. What is the project’s simple rate of return?
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $4,700,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales $ 4,400,000 Variable expenses 2,000,000 Contribution margin 2,400,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 800,000 Depreciation 940,000 Total fixed expenses 1,740,000 Net operating income $ 660,000 Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the project’s net present value? Net present value 2. What is the project’s…
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $4,700,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales $ 4,400,000 Variable expenses 2,000,000 Contribution margin 2,400,000 Fixed expenses: Advertising, salaries, and otherfixed out-of-pocket costs $ 800,000 Depreciation 940,000 Total fixed expenses 1,740,000 Net operating income $ 660,000 Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the project’s net present value? 2. What is the project’s…
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 23% each of the last three years. Casey is considering a capital budgeting project that would require a $4,700,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales $ 4,400,000 Variable expenses 2,000,000 Contribution margin 2,400,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 800,000 Depreciation 940,000 Total fixed expenses 1,740,000 Net operating income $ 660,000 Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the project’s net present value? 2. What is the project’s internal rate of return to the…
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 24% each of the last three years. Casey is considering a capital budgeting project that would require a $5,850,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 20%. The project would provide net operating income each year for five years as follows: Sales $ 5,200,000 Variable expenses 2,320,000 Contribution margin 2,880,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 880,000 Depreciation 1,170,000 Total fixed expenses 2,050,000 Net operating income $ 830,000 view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the project’s net present value? 2. What is the project’s internal rate of return to the nearest whole…
Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 25% each of the last three years. Derrick is considering a capital budgeting project that would require a $5,170,000 investment in equipment with a useful life of five years and no salvage value. Holston Company’s discount rate is 19%. The project would provide net operating income each year for five years as follows: Sales $ 4,500,000 Variable expenses 2,000,000 Contribution margin 2,500,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $ 780,000 Depreciation 1,034,000 Total fixed expenses 1,814,000 Net operating income $ 686,000 Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Required: 1. Compute the project's net present value. 2. Compute the project's simple rate of return.…