Problem 1:

Two divisions of a company, division X with operating income of $200,000 and division Y with
operating income of $40,000.
Division X has average invested capital of $1 million and division Y has average invested capital of
$800,000.
Assume that the company’s cost of capital is 10%, and, for simplicity, ignore taxes.
Suppose each division is considering a new proposed project.
Division X is considering Project A that will earn 15% annually on a $500,000 investment, or
$75,000 a year.
Division Y is considering Project B that will earn 7% annually on an $800,000 investment, or $56,000
a year
Suppose performance evaluation is based on ROI. Would the manager of division X invest in Project
A and
the manager of division Y invest in Project B.
Suppose performance evaluation is based on economic profit. Would the manager of division X invest
in Project A and
the manager of division Y invest in Project B.
Support your answer by calculation.

Problem 2 :
Consider the following data regarding budgeted operations for 20X7 of the Austin division of
Texas
Products :

1. a. What average unit sales price does the Austin division need to obtain its desired
rate of return
on average total assets?
b. What would be the expected capital turnover?
c. What would be the return on sales?

2 . a. If the selling price is as previously computed, what rate of return will the
division earn on
total assets if sales volume is 170,000 units?
b. If sales volume is 130,000 units?