Reference no: EM132875449

Question - Financial Performance Measurement - Operating results for the Porl division for 2021 are budgeted as follows:

Cure Company is a decentralized organization with several autonomous divisions.

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%

Requirement -

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.