1 [10 points). Lieme Corporation sells appliances through two divisions: Household and Professional. The company's estimated 2021 income statement, by division, is below: Household Division Professional Division Total Sales Variable costs Contribution margin Divisional fixed costs Division margin Allocated corporate-level fixed costs Net income (loss) $90,000,000 75,000,000 $ 15,000,000 13,000,000 $ 2,000,000 1,500,000 $ 500,000 $ 7,000,000 5,500,000 $ 1,500,000 700,000 $ 800,000 900,000 $ (100,000) $97,000,000 80,500,000 $ 16,500,000 13,700,000 $ 2,800,000 2,400,000 $ 400,000 The company's January 1, 2021 balance sheet is below: Household Division Professional Division Corporate Level Total Cash Accounts Receivable Inventory Plant and Equipment net Total Assets $ 1,800,000 7,500,000 6,250,000 2,000,000 $ 17,550,000 $ 140,000 600,000 1,000,000 1,000,000 $ 2,740,000 $ 1,940,000 8,100,000 7,250,000 3,000,000 $ 20,290,000 $ $ 460,000 Accounts Payable $ 6,250,000 Long Term Debt Shareholder equity Total Liabilities and Stockholder Equity $ 6,250,000 $3,580,000 10,000,000 $ 13,580,000 $ 6,710,000 3,580,000 10,000,000 $ 20,290,000 $ 460,000 For simplicity, assume that the company's December 31, 2021 balance sheet is expected to be exactly the same as the January 1, 2021 balance sheet. The company uses a company-wide required annual rate of return of 15%. Early in 2021, an internal consulting project identified identical cost-reduction opportunities at both divisions. For each division, this would require a one-time investment of $180,000; annual cost reduction at each division would equal $40,000. 1. From the point of view of the company's owners, should the Household Division make the cost-reduction investment? From the point of view of the company's owners, should the Professional Division make the cost-reduction investment? Provide quantitative justification for your answer. 2. Top manager of each divisions is compensated based on that division's ROI (computed using that division's Division margin and divisional net assets, including Cash). Will the top manager of the Household Division make the cost-reduction investment? Will the top manager of the Professional Division make the cost- reduction investment? Provide quantitative justification for your answers. 3. The company is considering changing divisional managers' incentive plans. If the changes are made, top manager of each division would be compensated based on divisional residual income (instead of divisional ROI). Each division's residual income would be computed using that division's Division margin and divisional net assets, including Cash. What is the Household Division's estimated 2021 residual income? What is the Professional Division's estimated 2021 residual income? 4. If divisional managers' incentive plans are changed as described in part 3 above, will the top manager of the Household Division make the cost-reduction investment? Will the top manager of the Professional Division make the cost-reduction investment? Provide quantitative justification for your answers. 1 [10 points). Lieme Corporation sells appliances through two divisions: Household and Professional. The company's estimated 2021 income statement, by division, is below: Household Division Professional Division Total Sales Variable costs Contribution margin Divisional fixed costs Division margin Allocated corporate-level fixed costs Net income (loss) $90,000,000 75,000,000 $ 15,000,000 13,000,000 $ 2,000,000 1,500,000 $ 500,000 $ 7,000,000 5,500,000 $ 1,500,000 700,000 $ 800,000 900,000 $ (100,000) $97,000,000 80,500,000 $ 16,500,000 13,700,000 $ 2,800,000 2,400,000 $ 400,000 The company's January 1, 2021 balance sheet is below: Household Division Professional Division Corporate Level Total Cash Accounts Receivable Inventory Plant and Equipment net Total Assets $ 1,800,000 7,500,000 6,250,000 2,000,000 $ 17,550,000 $ 140,000 600,000 1,000,000 1,000,000 $ 2,740,000 $ 1,940,000 8,100,000 7,250,000 3,000,000 $ 20,290,000 $ $ 460,000 Accounts Payable $ 6,250,000 Long Term Debt Shareholder equity Total Liabilities and Stockholder Equity $ 6,250,000 $3,580,000 10,000,000 $ 13,580,000 $ 6,710,000 3,580,000 10,000,000 $ 20,290,000 $ 460,000 For simplicity, assume that the company's December 31, 2021 balance sheet is expected to be exactly the same as the January 1, 2021 balance sheet. The company uses a company-wide required annual rate of return of 15%. Early in 2021, an internal consulting project identified identical cost-reduction opportunities at both divisions. For each division, this would require a one-time investment of $180,000; annual cost reduction at each division would equal $40,000. 1. From the point of view of the company's owners, should the Household Division make the cost-reduction investment? From the point of view of the company's owners, should the Professional Division make the cost-reduction investment? Provide quantitative justification for your answer. 2. Top manager of each divisions is compensated based on that division's ROI (computed using that division's Division margin and divisional net assets, including Cash). Will the top manager of the Household Division make the cost-reduction investment? Will the top manager of the Professional Division make the cost- reduction investment? Provide quantitative justification for your answers. 3. The company is considering changing divisional managers' incentive plans. If the changes are made, top manager of each division would be compensated based on divisional residual income (instead of divisional ROI). Each division's residual income would be computed using that division's Division margin and divisional net assets, including Cash. What is the Household Division's estimated 2021 residual income? What is the Professional Division's estimated 2021 residual income? 4. If divisional managers' incentive plans are changed as described in part 3 above, will the top manager of the Household Division make the cost-reduction investment? Will the top manager of the Professional Division make the cost-reduction investment? Provide quantitative justification for your answers