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What factors should Huddle's manager and her supervisor, the VP of operations, consider in deciding whether to go forward with the expansion?
Cisco Manufacturing is a decentralized corporation. Divisions are treated as investment centers. In recent years, Acme has been running about 11% ROA for the corporation as a whole, and has a cost of capital of 9%. One of their most profitable divisions is Huddle Products, which last year had ROA of 17% ($1,700,000 operating income on assets of $10,000,000). Huddle has an opportunity to expand one of its plants to produce a promising new product. The expansion will cost two million dollars, and is expected to increase operating earnings to $2,100,000. What factors should Huddle's manager and her supervisor, the VP of operations, consider in deciding whether to go forward with the expansion? Show any necessary calculations.
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What factors should Huddle's manager and her supervisor, the VP of operations, consider in deciding whether to go forward with the expansion?
Cisco Manufacturing is a decentralized corporation. Divisions are treated as investment centers. In recent years, Acme has been running about 11% ROA for the corporation as a whole, and has a cost of capital of 9%. One of their most profitable divisions is Huddle Products, which last year had ROA of 17% ($1,700,000 operating income on assets of $10,000,000). Huddle has an opportunity to expand one of its plants to produce a promising new product. The expansion will cost two million dollars, and is expected to increase operating earnings to $2,100,000. What factors should Huddle's manager and her supervisor, the VP of operations, consider in deciding whether to go forward with the expansion? Show any necessary calculations.
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This expansion for Huddle does make financial sense because an additional 20% investment in assets (2 million is 20% of current asset base of 10,000,000) is resulting in 400,000 extra profit and new ROA of 17.5% (21,00000/120,00000). In ...
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