Reference no: EM132870291
Question - ABC Company is a decentralized organization with several autonomous divisions.
Operating results for the A division for 2021 are budgeted as follows:
Revenues $5,000,000
Variable costs 2,500,000
Contribution margin 2,500,000
Fixed expenses 1,800,000
Net operating income 700,000
Operating assets (i.e., investment) for the division are currently $3,000,000.
For 2021, the division can add a new product line for an investment of $1,080,000. The new product line will generate sales of $1,600,000 and will incur fixed expenses of $400,000 annually. Variable costs of the new product will average 60% of the selling price.
The cost of capital is 13%
Required -
1. Using the above information, calculate the performance measure that potentially creates the under-investment problem.
2. Regardless of your answer to (1), calculate a performance measure that potentially reduces the under-investment problem.
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