Tupelo Industries Inc., is privately held diversified company with five separate divisions organized as investment centers. A condensed income statement for the Specially Products Divisions for the past year, assuming no service department charges, is as follows:
The manager of the specially Products Division was recently presented with the opportunity to add an additional product line, which would require invested assets of$14,400,000. A projected statement for the new product line is as follows:
The Specialty Products Division currently has $33,750,000 in invested assets, and Tupelo Industries Inc,’s overall rate of return on investment, including all divisions, is 10% Each division manager is evaluated on the basis of divisional rate of return on investment. A bonus is paid, in $3,000 increments, for each whole percentage point that the division’s rate of return on investment, for each whole percentage point that the division’s rate of return on investment exceeds the company average.
The president is connected that the manager of the Specialty Products Division rejected the addition of the new product line, even though all estimates indicated that the product line would be profitable and would increase overall company income. You have been asked to analyze the possible reasons why the Specialty Products Division manger rejected the new product line.
1. Determine the rate of return on investment for the Specialty Products Division for the past year.
2. Determine the Specialty Products Division manager’s bonus for the past year.
3. Determine the estimated rate of return on investment for the new product line. Round whore percents to one decimal place and investment turnover to two decimal places.
4. Why might the manager of the Specialty Products Division decide to reject the new product line? Support your answer by determine the projected rate of return on investment for 2012, assuming that the new product line was launched rate of return on investment for 2012, actual operating results were similar to those of 2011.
5. Can suggest as alternative performance measure for motivating division managers to accept new investment opportunities that would increase the over all company income and rate on return on investment?