Kelfour Enterprises has divided its operations into two divisions. Relevant accounting data for each division is as follows: Divisions Sales Operating Assets Operating Income Western
Kelfour Enterprises has divided its operations into two divisions. Relevant accounting data for each division is as follows:
| Divisions | Sales | Operating Assets | Operating Income |
|---|---|---|---|
| Western Division | $ 150,000 | $ 100,000 | $ 15,000 |
| Eastern Division | $ 300,000 | $ 150,000 | $ 16,500 |
Kelfour has an additional $50,000 of funds to invest. The manager of the Western Division believes that she can invest the funds at a rate of return (ROI) of 14% while the manager of the Eastern Division has found a new investment opportunity that is expected to yield a 12% ROI. Kelfour uses residual income (RI) to evaluate managerial performance. The company wide desired ROI is 10%. Based on this information
Multiple Choice
All of the answers represent true statements.
The CEO would be indifferent because the $50,000 additional investment would increase the RI of the company as a whole regardless of which Division receives the additional investment.
The manager of the Eastern Division would accept the $50,000 additional investment opportunity because it would increase the Division's RI by $2,000.
The manager of the Western Division would accept the $50,000 additional investment opportunity because it would increase the Division's RI by $2,000.
(Note - according to previous grading, the last option choice is incorrect)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Authors: Carl S. Warren, Amanda Farmer
9th Edition
0357132599, 978-0357132593
