Question
BrightTech Ltd has two Divisions that manufacture and sell agricultural products: Lawn and Tree Divisions. The following historical cost accounting data relate to Lawn and
BrightTech Ltd has two Divisions that manufacture and sell agricultural products: Lawn and Tree Divisions. The following historical cost accounting data relate to Lawn and Tree Divisions for the year 2020: Lawn Tree Revenues 2,200,000 1,000,000 Variable costs 520,000 240,000 Fixed costs (excluding depreciation) 300,000 280,000 Plant depreciation 250,000 70,000 Operating income 1,130,000 410,000 Divisional assets (at Gross Book Value) 1,800,000 600,000 Accumulated depreciation (350,000) (160,000) Divisional assets (at Net Book Value) 1,450,000 440,000 BrightTech's CEO has $400,000 available to invest in one project in either Lawn or Tree Division. The expected operating income for this investment is $115,000 in 2021. The company's required return on investment is 25%.
1) Calculate the ROI of each Division in 2020 based on total assets at Net Book Value. Show your workings.
2) If Division managers are evaluated and their bonuses are paid based on increasing ROI based on total assets at Net Book Value of their Divisions:
(a) Which manager/managers would agree to invest the $400,000 available in his/her Division? Why? Show your workings.
(b)Are their decisions congruent with BrightTech CEO's decision?
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