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Three cousins, Harry, Dan and Sarah, are owners of a small business recently inherited from their fathers. They are not convinced that the results controls

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Three cousins, Harry, Dan and Sarah, are owners of a small business recently inherited from their fathers. They are not convinced that the results controls implemented by their fathers have been effective in encouraging managers to make good investment decisions. The cousins define good investment decisions as investments that are greater than the company's cost of capital. The current cost of capital is 12%. The cousins are in a meeting discussing various changes to the results controls. The current compensation policy evaluates managers of four of the company's responsibility (Centers W, X, Y and Z) based on meeting or exceeding budgeted profit. Here are the other alternatives being considered: Alternative One: ROI: A center would need to show a ROI that meets or exceeds their center's current ROI for the management team to earn a bonus. Alternative Two: Simple RI: A center would need to have a positive RI for their management to earn a bonus. Under this alternative, RI will be computed assuming total assets are charged at the current cost of capital. Alternative Three: RI: A center would need to have a positive RI for their management to earn a bonus. m. Under this alternative, RI will be computed assuming current assets are charged at 6% and fixed assets at 16%. There are four other responsibility centers, Human Resources (Center A), Public Relations (Center B) Manufacturing (Center C) and Branch Sales (Center D). These centers are evaluated differently than Centers W, X, Y and Z. In particular, both Human Resources (Center A) and Public Relations (Center B) evaluated based on meeting their budged expense target while accomplishing the tasks expected of their function. Center C manufactures the products sold by the company and the manager of that center is evaluated based on the efficiency in producing the product. There is a well-established relationship between inputs and outputs for Center C. Center D is a sales function and that center is accountable for for generating revenues. There are no plans to change the ways the managers of A, B, C and D are evaluated. The following information has been prepared for four of the company's centers: Receivable Total Center Cash Inventories S Fixed Asset Investment Profit W $4 $12 $19 $75 $110 $11 X $3 $15 $20 $47 $85 $9 Y $7 $17 $21 $95 $140 $21 Z $12 $23 $20 $105 $160 $224. The general manager of Center Y is evaluating an investment opportunity of $16 which is expected to generate $2.00 in profit for the center. The investment will increase the center's fixed assets by $12. and the current assets by $4. Assuming Alterative One is implemented, would the manager of Center Y be likely to go ahead with this investment? a. Yes, the manager would likely invest b. No, the manager would be unlikely to invest c. Not enough information to determine

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