B Division results for the last year: B Division is considering a new product li
ID: 2558426 • Letter: B
Question
B Division results for the last year:
B Division is considering a new product line, and develops the following estimates for the line:
a.) Determine the effect on B Division’s ROI if it introduces the new product line. Would managers be likely to introduce the new product line based on ROI?
b.) B Division's required rate of return is 8%. Determine the effect on B Division’s Residual Income if it introduces the new product line. Would managers be likely to introduce the new product line based on Residual Income?
Sales $400,000 Variable costs 200,000 Fixed costs 150,000 Total operational assets 350,000Explanation / Answer
a) New ROI = (100000-50000-30000)+(400000-200000-150000)/(200000+350000) = 70000/550000 = 12.72%
Old ROI = (400000-200000-150000)/(350000) = 14.28%
New product will not be introduced.
b) New Residual income = (12.72-8) % of 550000 = 26125
Old residual income = (14.28-8)% of 350000 = 21980
So new product should be introduced.
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