The following data pertain to the Oxnard Division of Kemp Company:

\begin{array} { | l | r | } \hline \text { Divisional contribution margin } & \$ 700,000 \\\hline \text { Profit margin controllable by the divisional manager } & 320,000 \\\hline \text { Profit margin traceable to the division } & 294,400 \\\hline \text { Average asset investment } & 1,280,000 \\\hline\end{array}

The Company uses responsibility accounting concepts when evaluating performance, and Oxnard's division manager is contemplating the following three investments. He can invest up to $400,000.

\begin{array} { | l | r | r | r | } \hline & { \text { No. 1 } } & { \text { No. 2 } } & { \text { No. 3 } } \\\hline \text { Cost } & \$ 250.000 & S 300,000 & \$ 400.000 \\\hline \text { Expected income } & 50.000 & 54.000 & 96.000 \\\hline\end{array}

Required:
A. Calculate the ROIs of the three investments.
B. What is the division manager's current ROI, computed by using responsibility accounting concepts?
C. Which of the three investments would be selected if the manager's focus is on Oxnard's divisional performance? Why?
D. If Kemp has an imputed interest charge of 22%, compute the residual income of investment no. 3. Is this investment attractive from Oxnard's perspective? From Kemp's perspective? Why?

Decentralized Firms Can Delegate Authority by Structuring an Organization into Responsibility

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