roblem 9-14B Return on Investment (ROI) and Residual Income [LO9-1, LO9-2 I know
ID: 2403987 • Letter: R
Question
roblem 9-14B Return on Investment (ROI) and Residual Income [LO9-1, LO9-2 I know headquarters wants us to add that new product line, " said Brian Stettler, manager of Sparks roducts' Central Division. "But I want to see the numbers before I make a move. Our division's return on vestment (RO) has led the company for three years, and I don't want any letdown." Sparks Products is a decentralized wholesaler with four autonomous divisions. The divisions are valuated on the basis of ROl, with year-end bonuses given to divisional managers who have the highest Ol. Operating results for the company's Central Division for last year are given below Sales Variable expenses S 24,000,000 15,272,727 Contribution margin Fixed expenses 8,727,273 6,574,000 2,153,273 6,000,000 Net operating income Divisional operating assets The company had an overall ROI of 14% last year (considering all divisions). The gmpany's Central ivision has an opportunity to add a new product line that would require an investment of $3,830,000. The ost and revenue characteristics of the new product line per year would be as follows Sales Variable expenses Fixed expenses $ 11.290.000 65% of sales $ 3,070,910 Required:Explanation / Answer
1)ROI = Net Income / Average asset invested
**Net operating income from new product line = sales [1-variable cost ] -fixed cost
= 11290000[1-.65]-3070910
= 880590
2)since accepting new product line increases the overall ROI ,you should accept the new product line
3)Adding the new product line increases new product line
4)
Residual income = net operating income - [asset invested * minimum required return]
Present 2153273/6000000 .3589 or 35.89% New product Line 880590/3830000 .2299 or 22.99% Total 58.88%Related Questions
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