Problem 1

The following data pertain to the Western Division of Jordan Company:

Division total contribution margin	$500,000
Profit margin controllable by the divisional manager	150,000
Net book value of assets	600,000

Management bonuses are awarded at the end of each year and based on ROI, and the company uses responsibility accounting concepts when evaluating performance. (Hint: take the information above as the status quo.)

Western's division manager is contemplating the following three investments. The opportunities are independent from each other, which means investing in 0, 1, 2, or 3 projects are all options. Jordan has a cost of capital of 15% and uses straight line depreciation with no salvage value.

	No. 1	No. 2	No. 3
Initial Investment	$160,000	$200,000	$300,000
Annual Expected Profit (includes depreciation as an expense)	32,000	24,000	50,000
Years	3	3	3
Salvage Value	0	0	0

Use beginning of period book value for all calculations (no need to average with end of period asset value).

Part A. Assuming shareholders prefer to implement any project with positive NPV, which investment(s) (if any) would Jordans shareholders want the division manager to make?

Part B. Assuming that the divisional managers objective is to maximize the current years bonus, which investment(s) (if any) would the manager of the Westerns division undertake? Why? Is this choice goal congruent? Why?

Part C. Still assuming that the divisional managers objective is to maximize the current years bonus, which investment(s) (if any) would the manager of the Westerns division undertake if the division were evaluated using residual income as the performance measure. Would the managers decisions be goal congruent? Why?