Abstract Company has three divisions that operate autonomously. The budgets for Division A for 2021 are prepared as follows: Operating income $ 1,280,000 Investment base $ 8,000,000 For 2021, a manager of Division A is considering a proposal to add a new product line for investment of $3,000,000. The new product line will generate additional operating income of $420,000. The budgets shown above are prepared before considering the proposal. The company uses a 11% required rate of return on investment for each division. Required: For Return On Investment (ROI), show your answer in a percent form and round to two decimal places (e.g., 1.23%). (a) Assuming the manager accepts the proposal, compute ROI and Residual Income for Division A. (b) Assume that each manager receives an annual bonus based on increasing the division’s ROI. If Division A’s manager is interested in maximising her bonus, would she accept this proposal? Why or why not? (c) Assume that each manager receives an annual bonus based on increasing the division’s residual income. If Division A’s manager is interested in maximising her bonus, would she accept this proposal? Why or why not? (d) From the company’s perspective, should the proposal be accepted? Why or why not?
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Abstract Company has three divisions that operate autonomously. The budgets for Division A for 2021 are prepared as follows:
|
Operating income |
$ 1,280,000 |
|
Investment base |
$ 8,000,000 |
For 2021, a manager of Division A is considering a proposal to add a new product line for investment of $3,000,000. The new product line will generate additional operating income of $420,000. The budgets shown above are prepared before considering the proposal. The company uses a 11% required rate of
Required:
For Return On Investment (ROI), show your answer in a percent form and round to two decimal places (e.g., 1.23%).
(a) Assuming the manager accepts the proposal, compute ROI and Residual Income for Division A.
(b) Assume that each manager receives an annual bonus based on increasing the division’s ROI. If Division A’s manager is interested in maximising her bonus, would she accept this proposal? Why or why not?
(c) Assume that each manager receives an annual bonus based on increasing the division’s residual income. If Division A’s manager is interested in maximising her bonus, would she accept this proposal? Why or why not?
(d) From the company’s perspective, should the proposal be accepted? Why or why not?
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