I know headquarters wants us to add that new product line said Fred Halloway, ma
ID: 2448471 • Letter: I
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 number before i make a move. Our division's return on investments (ROI) has led the company for three years, and i dont 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 below:
Sales: $21,000,000
Variable Expenses 13,400,000
Contribution Margin 7,600,000
Fixed Expenses 5,920,000
Net Operating Income 1,680,000
Divisional Operating assetss 5,250,000
The company had an overall ROI of 18% last year (considering all divisions) The company's East Division has an opportunity to add a new product line tht would require an investment of $3,000,000. The cost and revenue characteristics of the new product line per year would be as follows:
Sales $9,000,000
Variable Expenses 65% f sales
Fixed expenses 2,520,000
Solve
1. Compute the East Divisions ROI for last year, also compute the ROI as it would appear if the new product line is added.
2. Suppose that the company's minimum required rate of return on operating assets is 15% and that performance is evaulated using residual income
A) Compute the East Divisions residual income for last year; also compute the residual income as it would appear if the new product line is added.
Explanation / Answer
Compute the East Divisions residual income for last year; also compute the residual income as it would appear if the new product line is added
Present New Line Total Sales 2,10,00,000 90,00,000 3,00,00,000 Variable Expenses 1,34,00,000 5850000 1,92,50,000 Contribution Margin 76,00,000 31,50,000 1,07,50,000 Fixed Expenses 59,20,000 25,20,000 84,40,000 Net Operating Income 16,80,000 6,30,000 23,10,000 Operating assets 52,50,000 30,00,000 82,50,000 ROI Net Operating Income/Operating Assets 32.00% 21.00% 28%