Question

Each manager is presented with an opportunity anticipated to yield a 16% return on investment. The company's hurdle rate is 14%. Which of the following statements is incorrect?

a. The manager of Initiation is the least effective in terms of generating sales revenue from invested capital.

b. The manager of the Good Morning line would likely accept the new investment opportunity if their bonus is dependent on meeting or exceeding the prior period return on investment results.

c. Initiation has the highest sales margin of all the divisions.

d. If relying on a residual income approach to award bonuses to managers, all managers would accept the new investment opportunity.

e. Double Trouble's manager would accept the new investment opportunity, regardless of whether ROI or RI is used to determine bonuses.

Answer 1

The incorrect statement is option c. Initiation does not have the highest sales margin among all the divisions.

Step-by-step explanation:

The incorrect statement in this question is option c. According to the information given, Initiation has the lowest sales margin among all the divisions. It does not have the highest sales margin as stated in option c.

To determine this, we need to compare the expected return on investment (ROI) of each division with the company's hurdle rate. The hurdle rate is the minimum rate of return required by the company to accept an investment opportunity.

If the ROI of an investment opportunity is greater than the hurdle rate, the manager of that division would likely accept the opportunity. If the ROI is less than the hurdle rate, the manager would likely reject the opportunity.

In this case, the anticipated ROI of the investment opportunity is 16%, which is greater than the company's hurdle rate of 14%. Therefore, all managers would accept the new investment opportunity, regardless of whether ROI or residual income (RI) is used to determine bonuses (options b and d are correct).

However, it is stated that the manager of the Initiation division is the least effective in terms of generating sales revenue from invested capital, meaning that the division has the lowest sales margin. Therefore, option c is incorrect.

Based on the given information, we cannot determine whether the manager of the Double Trouble division would accept the new investment opportunity or not, as it is not stated how the division's ROI or RI compares to the company's hurdle rate (option e is undetermined).