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Division managers of Sandoval Incorporated are delegated decision-making authority over sales activities, costs incurred, and investments made in plant and equipment. They are considered
Division managers of Sandoval Incorporated are delegated decision-making authority over sales activities, costs incurred, and investments made in plant and equipment. They are considered investment centers for performance evaluation. Division A reported the following results from last year's operations: Sales $ 13,200,000 Variable Expenses $ 8,490,000 Contribution Margin $ 4,710,000 Fixed Expenses $ 3,486,000 net operating income $ 1,224,000 average operating assets $ 6,000,000 At the beginning of this year, Division A has an opportunity to invest $1,000,000 in a project with the following characteristics: Estimated annual sales $ 3,400,000 Contribution Margin Ratio 50% of sales Additional fixed expenses $ 1,524,000 Minimum Required rate of return 17% Required: 1. What was the return on investment (ROI) in the prior year? 2. What was last year's residual income? 3. If Division A pursues the investment opportunity and otherwise performs the same as last year, what will be the ROI for the year? 4. If Division A pursues the investment opportunity and otherwise performs the same as last year, what will be the residual income for the year? 5. If Sandoval's division managers earn a bonus only if ROI for this year exceeds ROI for last year, would the manager pursue the investment opportunity? 6. If Sandoval's division managers earn a bonus only if residual income for this year exceeds residual income for last year, would the manager pursue the investment opportunity? 7. From the company's perspective, do you think the investment opportunity should be pursued? Why or why not?
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