A. Which of the three investments would be the first choice of the Western division manager? Why?
B. Which investment(s) (if any) would Jordan's shareholders want the division manager to make? Why?
The following data pertain to the Western Division of Jordan Company:
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Division total contribution margin
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$500,000
|
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Profit margin controllable by the divisional manager
|
200,000
|
|
Average asset investment
|
600,000
|
Management bonuses are based on ROI, and the company uses responsibility accounting concepts when evaluating performance. Western's division manager is contemplating the following three investments. He can invest up to $300,000. Jordan has a cost of capital (RRR) of 20%.
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No. 1
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No. 2
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No. 3
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Cost
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$160,000
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$200,000
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$300,000
|
|
Expected income
|
52,000
|
34,000
|
80,000
|