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Managerial Accounting

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Pronto Co. Use of Return on Assets weakness ethical issue

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Pronto Co. awards large bonuses at year end for division managers. This bonus is based on return on assets (ROA) times $4,000,000 each year. Division managers with a ROA below the cost of capital get no bonus.

The East Division manager has been well above the cost of capital for years and is earning close to 17% ROA. A customer in the East Division's area requested a proposal for a new project.

The East Division manager estimated that the ROA on that proposal would be about 8%, just above the cost of capital. What is East Division manager's likely response and the impact on Pronto Co.?

A

East Division Manager will decline the new project and this will prevent Pronto Co. from growing.

B

East Division Manager will decline the new project and this will prevent Pronto Co. from losing money.

C

East Division Manager will accept the new project and this will contribute towards Pronto Co. growing profits.

D

East Division Manager will accept the new project but this will reduce Pronto Co's profits.