Reference no: EM132509789

Financial Performance Measures

Margaret Company is a decentralized organization with several autonomous divisions. Operating results for the Wales Division for 2017 are budgeted as follows:

Sales$ 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 $3,600,000.
• For 2017, 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:

Question1 : Using the above information, calculate the performance measure that potentially induces (i.e., creates) the under-investment problem.

Question2 : Regardless of your answer above, calculate a performance measure that potentially mitigates (i.e., reduces) the aforementioned under-investment problem.