\"I know headquarters wants us to add that new product line,\" said Fred Hallowa
ID: 2437859 • Letter: #
Question
"I know headquarters wants us to add that new product line," said Fred Halloway, manager of Kirsi Products' East Division. "But I want to see the numbers before make a move. Our division's return on investment (ROI) has led the company for three years, and I don't want any letdown." Kirsi Products is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the highest ROl. Operating results for the company's East Division for last year are given below: 24,750,000O Sales 13,000,000 Variable expenses 11,750,000 9,695,750 2,054,250 Contribution margin Fixed expenses Net operating income 5,500,000 Divisional operating assets $Explanation / Answer
1
Compute the east divison ROI for the last year also compute the ROI as it would added if new product is added
Present
New Line
Total
1
Sales
24750000
8400000
33150000
2
Operating Income
2054250
579600
2633850
3
Operating assets
5500000
2800000
8300000
4
Margin (2/3)
8.3%
6.9%
7.9%
5
Turnover (1/3)
4.5
3
3.9940
6
ROI (4 *5)
37.4%
20.7%
31.7%
$
Sales
8400000
Variable expense
5460000
Contribution Margin
2940000
Fixed expenses
2360400
Operating income
579600
2. If you were in fred hallowway’s position would you accept or reject new product line.
Reject.ROI is reduced after accepting the new product line.
3.What would you suppose headquarters in anxious for the east division to add the new product line.
The company over all ROI for the last year is 18% but after accepting the new product line it increases to 20.7%. Thus adding new product line will increase overall ROI
4. Suppose the company minimum required rate of return on operating assets is 16% and that performance is evaluated using residual income.
Present
New Line
Total
1
Operating assets
5500000
2800000
8300000
2
Minimum required return
16%
16%
16%
3
Minimum Operating income
880000
448000
1328000
4
Actual operating income
2054250
579600
2633850
5
Minimum net operating income
880000
448000
1328000
6
Residual income
1174250
131600
1305850
Present
1174250
New product line
131600
Total
1305850
b. under these circumstances, if you were in fred halloway’s position would you accept or reject the new product line
Accept, adding new product line would increase the residual income of total divison
1
Compute the east divison ROI for the last year also compute the ROI as it would added if new product is added
Present
New Line
Total
1
Sales
24750000
8400000
33150000
2
Operating Income
2054250
579600
2633850
3
Operating assets
5500000
2800000
8300000
4
Margin (2/3)
8.3%
6.9%
7.9%
5
Turnover (1/3)
4.5
3
3.9940
6
ROI (4 *5)
37.4%
20.7%
31.7%
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