Question
Raynor Corporation has two divisions: East and West. The East division has the following assets: Plant, Property and Equipment: $$50 million; Accounts Receivable: $10 million
Raynor Corporation has two divisions: East and West. The East division has the following assets: Plant, Property and Equipment: $$50 million; Accounts Receivable: $10 million and inventory $12 million. For the year 2018, the East division has budgeted a profit of $20 million. The West division has the following assets: Plant, Property and Equipment: $100 million; Accounts Receivable: $30 million, and Inventory $45 million. Its budgeted profit for the year 2018 is $40 million. The following opportunities are available to both divisions: (Action 1) Investment in new machinery $30 million that will result in additional profit of $7.5 million and (Action 2) Decreasing credit period and decreasing inventory resulting in loss of sales and reduction in accounts receivable and inventory. The profit impact of loss of sales is reduction in profit of $3 million. The accounts receivable balance reduces by $6 million and inventory reduces by $6 million as well. The divisions are measured based on Return on Assets. Which of the following statements is true?
a.)None of the actions are preferred by either division
b.)Action 1 is preferred by East and Action 2 is preferred by West
c.)Both Action 1 and Action 2 are preferred by East and by West
d.)Action 2 is preferred by East and Action 1 is preferred by West
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