1. Omega Inc. is a large business with several divisions, including Delta Division.  Omega’s headquarters and the majority of its operations are located in Canada, and are concentrated in natural resource extraction and chemical production. The Delta Division is located in Luxembourg and is a manufacturer of luxury soaps and other products aimed at the high-end retail market.  Omega has a company-wide ROI of 14% and pays bonuses based on divisional ROI.  The before-tax required rate of return on assets for all divisions of Omega is 10%.

Delta Division has reported the following results for 2019:

Sales revenue	$380,000
Variable costs	$220,000
Fixed costs	$125,000
Total operational assets	$150,000

Delta is considering adding a new product line.  Projected data for this product line are as follows:

Sales revenue	$73,500
Variable costs	$45,000
Fixed costs	$21,250
Total operational assets	$39,500

20       Required:

1. Based on the information provided above, what type of responsibility centre is the Delta Division?  Explain how this was determined.
2. Calculate the ROI of the new product line.
3. Determine the effect of the new product line on Delta’s ROI. Would Delta’s managers be encouraged to introduce the new product line.
4. What impact would the new project have on Omega’s ROI?  There is not enough information to calculate the new ROI, but there is enough to determine the direction of the change.  Will top management of Omega want to have the product introduced?
5. Calculate the residual income of the Delta Division before and after the new product is added.  Would the Delta Division’s managers be encouraged to introduce the new product if performance was measured using residual income?  Explain.
6. Describe the advantages of using residual income as a performance measure instead of using ROI. Why would Omega choose ROI, given the advantages just described?
7. The decision as to whether or not to delegate decision-making authority is influenced by the type of knowledge required to make decisions.  Evaluate whether Omega should delegate decision-making authority to the managers of Delta Division.   

Answer rating: 100% (QA)

1 Based on the information provided the Delta Division is an investment centre This is because it is responsible for its own operational assets and it... View the full answer