investment centers and transfer pricing.] question find as attached

CASE 13-50 Lesiure Time Corporation (LTC), a subsidiary of Big Deal Industries, manufactures go-carts and other recreational vechicles. Family recreational centers that feature not only go-cart tracks but miniature golf, batting cages, and arcade games as well have increased in popularity. As a result, LTC has been receiving some pressure from Big Deal's management to diversity into some of these other recreational areas. Hiring Hands, Inc. (HHI), one of the largest firms that leases arcade games to family recreational centers, is looking fo a friendly buyer. Big Deal's top management believes that HHI's assets could be acquired for an investment of $ 3.2 million and has strongly urged Gill Bushman, division manager of LTC, to consider acquiring HHI. Bushman has reviewed HHI's financial statement with his controller and they believe the acquisiton may not be in the best interest of LTC. How would the bonuses be based on residual income, using the company's 15 percent cost of capital? Big Deal Industries traditionally has evaluated all of its division on the basis of return on investment. The desired rate of return for each division is 20%. The management team of any division reporting an annual increase in the ROI is automatically eligible for a bonus. The management of divisions reporting a decline in the ROI must provide convincing explanations for the decline in order to be eligible for a bonus. Moreover, this bonus is limited to 50% of the bonus paid to divisions reporting an increase in ROI. In the following table are condensed financial statements for both LTC and HHI for the most recent year. Sales revenue............................................................ Leasing revenue.......................................................... Variable expenses....................................................... Fixed expenses............................................................. Operating income........................................................ Current assets............................................................. Long-lived assets........................................................ Total assets................................................................... Current liabilities........................................................ Long-term liabilities.................................................... Stockholders, equity................................................ Total liabilities and stockholders' equity................ HHI $1,550,000 ($650,000) ($600,000) $300,000 $950,000 550,000 $1,500,000 $425,000 600,000 475,000 $1,500,000 LTC $4,750,000 ($3,000,000) ($750,000) $1,000,000 $1,150,000 2,850,000 $4,000,000 $700,000 1,900,000 1,400,000 $,4,000,000 REQUIRED: 1. If Big Deal Industries continues to use ROI as the sole measure of divisional performance, explain why LTC would be reluctant to aquire HHI. 2. IF Big Deal Industries could be persuaded to use residual income to measure the performance of LTC, explain why LTC would be more willing to acquire HHI. 3. Discuss how the behaviour of division managers are likely to be affected by the use of the following performance measure: (1) Return on investment and (2) Residual income. quisiton may