Grate Care Company specializes in producing products for personal grooming. The company operates six divisions, including the
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After receiving the proposal and reviewing the potential effects, Fred turned it down. He then wrote a memo to corporate headquarters, indicating that his division would not be able to employ the capital in any new projects within the next eight to 10 months. He did note, however, that he was confident that his marketing and engineering staff would have a project ready by the end of the year. At that time, he would like to have access to the capital.
Required:
1. Explain why Fred Olsen turned down the proposal to add the capability of producing a crimping and waving iron. Provide computations to support your reasoning.
2. Compute the effect that the new product line would have on the profitability of the firm as a whole. Should the division have produced the crimping and waving iron?
3. Suppose that the firm used residual income as a measure of divisional performance. Do you think Fred’s decision might have been different? Why?
4. Explain why a firm like Grate Care might decide to use both residual income and return on investment as measures of performance.
5. Did Fred display ethical behavior when he turned down the investment? In discussing this issue, consider why he refused to allow the investment.
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Related Book For
Cornerstones of Cost Management
ISBN: 978-1285751788
3rd edition
Authors: Don R. Hansen, Maryanne M. Mowen
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