ACCT \"I know headquarters wants us to add that new product line,\" said Fred Ha

Question

ACCT

"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's East Division has an opportunity to add a new product line that would require an investment of $3,000,000. 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. Suppose that the company's minimum required rate of return on operating assets is 15% 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.

Explanation / Answer

Solution:

Working-

Return on Investment Present New Line Total Sales 21,000,000 9,000,000 30,000,000 Net Operating Income 1,680,000 630,000 2,310,000 Operating Assets 5,250,000 3,000,000 8,250,000 Margin= Net Operating Income / Sales *100 8.00% 7% 7.70% Turnover = Sales/ Invested Assets 4.00 3.00 3.64 ROI= Margin * Turnover 32% 21% 28%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.