Question 5 CK industries is a highly decentralized company which manufactures die machinery. Each division is responsible for its own sales, pricing, production and

Question

75 users unlocked this solution today!

Question 5 CK industries is a highly decentralized company which manufactures die machinery. Each division is responsible for its own sales, pricing, production and costs of operations and also responsible for the management of account receivable, inventories, account payable and the use of existing facilities. To meet its expansion needs, it recently acquired one of its supplies, YK Steel. To maintain YK's separate identity, CK reports YK's operations as an investment center. CK monitors all of its investment centers on the basis of return on investment (based on the average invested assets). Management bonus are based on ROI, and all investment centers are expected to earn a minimum of 7% return before income taxes. In 2021, the company has an opportunity for a new investment with an operating income of $1,000,000 per year and the average operating assets of $13,000,000. The YK division's operating assets were $16,000,000 at the end of 2020, a 6% increase over 2019 year-end balance. The income statement of YK Division is shown below: YK Division Operating Statement For Year Ended December 31, 2020 (000s omitted) Sales Cost of goods sold $29,500 19,920 Gross profit 9,580 Operating expenses Administration $2,808 Selling 4,332 7,140 Operating income 2,440 Required: 1. 2. Using the concepts of goal congruence, explain if the corporation's decision about the new investment opportunity will be different from that of the division in 2021? Discuss with supporting calculations. (7 marks) Based on the conclusion in part (1), do you think if any changes should be made to the company's compensation policy (answer with supporting computations)? (8 marks)