1. The following data refers to the Daniels division of Tippett Inc. Daniels sel
ID: 2597536 • Letter: 1
Question
1. The following data refers to the Daniels division of Tippett Inc. Daniels sells variablespeed drills. The standard drill sells for $ 40, and Daniels plans to sell 30,000 units in 2017. Tippett treats Daniels as an investment center with a total attributable investment of $ 800,000. Daniels' annual fixed costs are $ 200,000. Variable cost per standard drill is $ 24. The firm's required rate of return on investment is 15%.
1.1 What is the expected Return on Investment in 2017?
1.2 What is the expected residual income for Daniels in 2017?
1.3 A special order from a unit of the US Government has been received to buy from Daniel 10,000 units every year of the device at the price of $30 each. If the order is accepted, Daniels will have to incur additional annual fixed costs of $30,000 for administration and $150,000 to modify and expand the manufacturing facilities.
Based on the effect on ROI and/or Residual Income for the first year, will the manager accept this order? Why and why not?
ANSWER FOR 1.2 IS 160,000 AND 1.3 ROI will decrease but RI>0
PLEASE SOLVE STEP BY STEP AND SHOW HOW YOU GET THESE ANSWERS. I DONT UNDERSTAND THE QUESTIONS.
Explanation / Answer
Return on investment=operating income/average investment
Residual income=net operating income-cost of capital
1.1
Expected operating income:
=Contribution margin-fixed costs
=[($40-$24)×30,000]-$200,000
=$280,000
return on investment=operating income/investment
=$280,000/800,000
=35%
1.2
Residual income=expected operating income- cost of capital
=$280,000-(800,000×15%)
=$160,000
1.3
Change in operating income=($30-$24)×10,000 units -$30,000
=$30,000
Return on investment=($280,000+$30,000)/(800,000+150,000)
=32.63%
Residual income=$310,000-(950,000×15%)
=$310,000-$142,500
=$167,500
Special order decrease the return on investment but increase the residual income. So accept the special order
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