“I know headquarters wants us to add that new product line,” said Fred Halloway,

ID: 2496879 • 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 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.”

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 ROI. Operating results for the company’s East Division for last year are given below:

The company had an overall ROI of 17.50% last year (considering all divisions). The company’s East Division has an opportunity to add a new product line that would require an investment of $2,326,200. The cost and revenue characteristics of the new product line per year would be as follows:

Compute the East Division’s ROI for last year; also compute the ROI as it would appear if the new product line is added. (Round your intermediate calculations and the "Turnover", "ROI" answers and "Margin" answers to 2 decimal places.)

please include: present new line total

sales

NOI

operating assests

margin

ROI

Suppose that the company’s minimum required rate of return on operating assets is 14.50% and that performance is evaluated using residual income.

Compute the East Division’s residual income for last year; also compute the residual income as it would appear if the new product line is added.

please include: operating assests, minimum required return, minimum net operating income, actual ner operating income, minimum net operaitng income, and residual income each for present, new line and total

Explanation / Answer

The company overall ROI is 17.5% and the New line in the East division would have 29.99% of ROI so

it shoud be accepted.

Ans 3 The East division ROI before introduction of new line is 43.73% but if the line is intoduced than the ROI

would be 39.05% the company's overall decrease in ROI.

Ans 4 Residual Income (RI) = A (B × C)

Residual Income (RI) = A (B × C)

A positive residual income means that the department has met the minimum return requirement while a negative residual income means that the department has failed to meet it. So the offer can be accepted

In $ Ans 1 Present New Line Total Sales 21600000 9300000 30900000 NOI (A) 1967400 697600 2665000 Operating Assets (B) 4499200 2326200 6825400 ROI A/B 43.73 29.99 39.05 Sales of new Line 9300000 Variable Cost 6045000 Fixed expenses 2557400 NOI 697600 ROI Net Operating Income/Total Investment*100 Ans-2

The company overall ROI is 17.5% and the New line in the East division would have 29.99% of ROI so

it shoud be accepted.

Ans 3 The East division ROI before introduction of new line is 43.73% but if the line is intoduced than the ROI

would be 39.05% the company's overall decrease in ROI.

Residual Income (RI) = A (B × C) In the above formula, A = Department's net operating income; B = Minimum required return on assets; and C = Average operating assets of the department

Ans 4 Residual Income (RI) = A (B × C)

In the above formula, A = Department's net operating income; B = Minimum required return on assets; and C = Average operating assets of the department Present New Line Total($) Actual NOI (A) 1967400 697600 2665000 Operating Assets © 4499200 2326200 6825400 Minimum required rate % (B) 0.145 0.145 0.145 Minimum Net Operating Income B*C 652384 337299 989683

Residual Income (RI) = A (B × C)

1315016.00 360301.00 1675317.00

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“I know headquarters wants us to add that new product line,” said Fred Halloway,

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