Beverly Company has two divisions:  Division A and Division B.

Managers of both divisions have decision-making rights and responsibilities for long-term investment decisions.

The following represents operating results for each of the divisions for FY 2020: 

 

		Division A		Division B
Revenues		$25,000		$14,000
Variable Costs		$12,500		$6,000
Fixed Costs		$9,000		$2,000
Net assets (i.e., investment)		$30,000		$30,600

 

Suppose that at the beginning of 2021, the Division A manager and Division B manager are considering an opportunity that requires a $4,000 investment to earn $600 in additional income.

The two division managers can each make an investment in this opportunity separately and independently of one another.

The firm has estimated its cost of capital at 12%.

The CEO of Beverly Company (a lovely person, by the way) recalls the following:

Two important performance measures reflect the effective and efficient use of assets (i.e., investments). One of these measures potentially creates the "underinvestment problem." The other of these measures helps reduce/eliminate the underinvestment problem. 

 

Question

Calculate the value of the performance measure that helps reduce/eliminate a potential underinvestment problem for Division A. (Note: Answer this question regardless of whether the underinvestment problem actually occurs.)

Note: Only enter numerals in the textbox and round to the nearest whole number. You need not include % or $.

 

Using the information from the Beverly Company problem noted above, which of the following statements are true? (Check all that apply.)

		The Division A manager would exhibit the underinvestment problem.
		The Division A manager would not exhibit the underinvestment problem.
		The Division B manager would exhibit the underinvestment problem.
		The Division B manager would not exhibit the underinvestment problem.

Answer rating: 100% (QA)

Value of the performance measure that eliminates reduces a potential underinvestment problem for Division A Answer Residual Income For FY 2020 without ... View the full answer