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[solution]: Hi! Can you help us answer our final project for accounting? We


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Hi! Can you help us answer our final project for accounting? We can't understand what our professor is teaching so we don't know what to do. Please show your solution if needed. Thank you! ;)


Mowen, Hansen, & Heitger

 

Cornerstone of Managerial Accounting, 5th edition (with modifications)

 

The manager of a division that produces add-on products for the automobile industry has just been

 

presented the opportunity to invest in two independent projects. The first is an air conditioner for the

 

back seats of vans and minivans. The second is a turbocharger. Without the investments, the division

 

will have average assets for the coming year of P28.9 million and expected operating income of P4.335

 

million. The outlay required for each investment and the expected operating income are as follows:

 

Outlay

 

Operating Income

 


 

Air Conditioner

 

Turbocharger

 

P750,000

 

P540,000

 

90,000

 

82,080

 


 

(Note: Round all numbers to two decimal places.)

 

Required:

 

1. Compute the ROI for each investment project.

 

2. Compute the budgeted divisional ROI for each of the following four alternatives:

 

a. The air conditioner investment is made.

 

b. The turbocharger investment is made.

 

c. Both investments are made.

 

d. Neither additional investment is made.

 

3. Assuming that divisional managers are evaluated and rewarded on the basis of ROI

 

performance, which alternative do you think the divisional manager will choose?

 

4. Suppose the company sets a minimum required rate of return equal to 14%. Calculate the

 

residual for each of the following four alternatives:

 

a. The air conditioner investment is made.

 

b. The turbocharger investment is made.

 

c. Both investments are made.

 

d. Neither additional investment is made

 

Which option will the manager choose based on residual income? Explain.

 

5. Suppose that the company sets a minimum required rate of return to 10%. Calculate the

 

residua income for each of the following four alternatives:

 

a. The air conditioner investment is made.

 

b. The turbocharger investment is made.

 

c. Both investments are made.

 

d. Neither additional investment is made.

 

Based on residual income, are the investments profitable? Why does answer differ from your

 

answer in requirement 3?

 


 

Page 1

 


 

 


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