“I know headquarters wants us to add that new product line,” said Brian Stettler
ID: 2446204 • Letter: #
Question
“I know headquarters wants us to add that new product line,” said Brian Stettler, manager of Sparks Products’ Central Division. “But I want to see the numbers before I make a move. Our division’s return on investment (ROI) 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 evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the highest ROI. Operating results for the company’s Central Division for last year are given below:
The company had an overall ROI of 19% last year (considering all divisions). The company’s Central Division has an opportunity to add a new product line that would require an investment of $3,930,000. The cost and revenue characteristics of the new product line per year would be as follows:
Suppose that the company’s minimum required rate of return on operating assets is 16% and that performance is evaluated using residual income.
Compute the Central Division’s residual income for last year; also compute the residual income as it would appear if the new product line is added.
PRESENT:_________
NEW PRODUCT LINE ALONE:_______
TOTAL:__________________
“I know headquarters wants us to add that new product line,” said Brian Stettler, manager of Sparks Products’ Central Division. “But I want to see the numbers before I make a move. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.”
Explanation / Answer
Answer:
1) Central Division’s residual income In$ In$ A Divisional operating assets 6125000 B Required rate of return on operating assets 16% C= A*B Minimum required return 980000 D Net Operating Income 2235091 E = D-C Residual Income 1255091 2) New products Residual Income In$ A Divisional operating assets 3930000 B Required rate of return on operating assets 16% C= A*B Minimum required return 628800 D Net Operating Income (WN -1) 918090 E = D-C Residual Income 289290 Total residual Income 1544381Related Questions
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