Home Insert Draw Page Layout Formulas Data Review View Calibri (Body) 11 A A = = D Bluv Av Av = == == - x fx BC Return on Investment (ROI) and Residual Income (L09-1, LO9-2] 23 Wrap Merg 1 Johnson 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 Central Division for last year are given below. $ $ Central Division Last Year Data: Sales Variable Expenses Contribution Margin Fixed Expenses Net Op. Income 23,000,000 14,636,364 8,363,636 6,374,000 1,989,636 $ $ Average Operating Assets 5,750,000 The company had an overall ROI of 16% last year (considering all divisions). The company's Central Division has been presented with an opportunity to add a new product line that would require an investment of $3,630,000. The cost and revenue characteristics of the new product line per year would be as follows: 17 $ New Product Line Data: Sales Variable Expenses Fixed Expenses 10,790,000 65% of sales 2,970,910 22 Required: 1 Compute the Central Division's Margin, Turnover and ROI for last year; Compute the Central Division's Margin, Turnover and ROI for the new line; and Compute the Central Division's updated Margin, Turnover and ROI as if the new line was added to last year's results. Last Year New Line Total 2 if you were the manager of the Central Divison, would you accept or reject the new product line, and why? Problem 1 Problem 2 Problem 3 + Insert Draw Page Layout Formulas Data Review View = Calibri (Body) BIU = = LO 11 VA A A Wraps Merg B C D E F 2 If you were the manager of the Central Divison, would you accept or reject the new product line, and why? 3 If you were the CEO of Johnson Products, would you want the Central Division to accept the new line, why or why not? 4 Suppose that the company's minimum required rate of return on operating assets is 13% and that performance is evaluated using residual income. Calculate the residual income for the Central Divison last year, for the new line, and for the Central Division as if the new line was added to last year's results. Last Year New Line Total 5 Based on residual income, if you were the manager of the Central Division would you accept or reject the new product line, why or why not