Reference no: EM132542761

The Beatrice company has two divisions, North and South, both of which are treated as investment centers. The following information was collected from the divisions' 2019 financial statements:

                                                                   North                         South

Net operating income (in $ thousands)                  19243                    9255

Sales (in $ thousands)                                         188833                 96060

End of year operating assets (in $ thousands)            63440                   30358

Variable cost (as a fraction of total costs)                   0.65                     0.63

Average selling price per unit                                        12.81                  12.12

Question 1: North division's manager is considering installing new equipment upgrade to expand production. The plant upgrade would increase fixed manufacturing costs by $1229 thousand annually and leave variable costs per unit unchanged. Operating assets would increase by $6074 thousand (Beatrice would need to borrow additional funds to provide this capital). The company could expand sales volume by 2113 thousand units. To increase sales, the price would need to be cut by $0.74.

What is the annual differential profit for Beatrice from the equipment upgrade (in $ thousand)?

Question 2: Based on the information in the prior question, what would North division's ROI be if the new equipment is installed? (Again 3 digits.)

Question 3: Another decision under consideration would increase operating profit of the South division by $1471 thousand and operating assets by $4208 thousand. Assume the manager of South division is evaluated based on ROI. Would the South manager choose to do what is in Beatrice's best interest in making this decision?