Reference no: EM132612240
Santana Broadcasting Company is comprised of two divisions, Music and News. The Divisions are organized as investment centers and their performance is evaluated on the basis of return on investment.
A summary of expected operations in 2003 for each division and the total corporation follows:
Music News Total
Sales $ 800,000 $1,200,000 $2,000,000
Expenses 700,000 900,000 1,600,000
Average Assets 1,000,000 2,000,000 3,000,000
A new project exists that could be purchased and put in place by 2003. Its costs are $500,000 and it would generate net income of $70,000 in 2003. This project is an investment that is available to managers of both the Music and News Divisions and to the corporate president.
Required:
Question (a) Which of these three individuals would be in favor of investing in the new project?
Question (b) If the divisional manager's performance is evaluated on the basis of residual income and for 2003, the corporate-wide target rate of return is 12%, which of the 3 individuals would be interested in investing in the new project?
Question (c) In the context of performance measures, what is meant by the term "sub-optimization', and under what circumstances does sub-optimization occur?
Question (d) Describe the management accountant's role in helping organisations design better incentive systems.
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