I know headquarters wants us add that new product line, said Brian Settler, mana
ID: 2743907 • Letter: I
Question
I know headquarters wants us add that new product line, said Brian Settler, manager of Sparks Products' Central Division. "But I want see the numbers before I make. Our division's division s return on investment (ROI) has led the company for three years, and I don't want any letdown." Sparks 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 Center Division for last year are given below. The company had an overall ROI of 14% last year (considering ail d visions) The company's Central Division has an opportunity to add a new product line that would require an investment of S3.500.000 The cost and revenue characteristics of the new product line per year would be as follows: Required: Compute the Central Division's ROI for last year; also compute the ROI as it would appear if the new product line is added. (Do not round intermediate percentage values. Round your final answers to 2 decimal places (e.e., 0.1234 should be entered as 12.34).) If you were in Brian Steller's position, would you accept or reject the new product line? Accept Reject Why do you suppose headquarters is anxious for the Central Division to add the new product line? Adding the new line would decrease the company's overall ROI. Adding the new line would increase the company's overall ROI. Suppose that the company's minimum required rate of return on operating assets is 11% and that performance is evaluated using residual income. Compute the Central Division's residual income for last year; also compute the residual income as it would appear if the new product line is added. Under these circumstance, if you were in Brian Stettler's position would you accept or reject the new product line? Accept RejectExplanation / Answer
1) Central Division’s residual income In$ In$ A Divisional operating assets 6125000 B Required rate of return on operating assets 16% C= A*B Minimum required return 980000 D Net Operating Income 2235091 E = D-C Residual Income 1255091 2) New products Residual Income In$ A Divisional operating assets 3930000 B Required rate of return on operating assets 16% C= A*B Minimum required return 628800 D Net Operating Income (WN -1) 918090 E = D-C Residual Income 289290 Total residual Income 1544381 WN-1 Operating Income from new product In$ A Sales 11540000 B Variable Expenses (65% of sales) 7501000 C= A-B Contribution Margin 4039000 D Fixed expenses 3120910 Net Operating Income 918090