Last Resort Industries Inc. is a privately held diversified company with five se

Question

Last Resort Industries Inc. is a privately held diversified company with five separate divisions organized as investment centers A condensed income statement for the Specialty Products Division for the past year, assuming no service department charges, is as follows Last Resort Industries Inc.-Specialty Products Division Income Statement For the Year Ended December 31, 2014 $32,400,000 24,300,000 3,240,000 4,860,000 The manager of the Specialty Products Division was recently presented with the opportunity to add an additional product line, which would require invested assets of $14,400,000. A projected income statement for the new product line is as follows: New Product Line Projected Income Statement For the Year Ended December 31, 2014 12,960,000 7,500,000 5,460,000 3,127,200

Explanation / Answer

Rate of retrun = net income/ total investment

1) ROI = $4,860,000/27,000,000 = 18%

2) ROI calulated above exceed the income average of 10% by 8%

hence bonus = $8000 * 8 = $64,000

3) Rate of return on new product line = $2,332,800/14,400,000 = 16.2%

4) rate of return if we submerge the new line = $7,192,800/ 41400,000 = 17.37%

since there is decrease in the rate of return on investment from the prevous year after the submeging , that could be the possible reason for decline

5) Another performance measured that can be used is gross profit margin

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