Question
I Do not know the answers for question number 4 A. or number 1's total % Please help and explain. I know headquarters wants us
I Do not know the answers for question number 4 A. or number 1's total % Please help and explain. 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 divisions return on investment (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 companys East Division for last year are given below: |
Sales | $ | 27,500,000 |
Variable expenses | 14,000,000 | |
Contribution margin | 13,500,000 | |
Fixed expenses | 11,245,000 | |
Net operating income | $ | 2,255,000 |
Divisional operating assets | $ | 5,500,000 |
The company had an overall ROI of 18% last year (considering all divisions). The companys East Division has an opportunity to add a new product line that would require an investment of $2,760,000. The cost and revenue characteristics of the new product line per year would be as follows: |
Sales | $ 8,004,000 |
Variable expenses | 65% of sales |
Fixed expenses | $ 2,249,124 |
Required: | |
1. | Compute the East Divisions ROI for last year; also compute the ROI as it would appear if the new product line is added. (Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.) |
ROI | |
Present | % |
New product line alone | % |
Total | % |
2. | If you were in Fred Halloways position, would you accept or reject the new product line? | ||||
|
3. | Why do you suppose headquarters is anxious for the East Division to add the new product line? | ||||
|
4. | Suppose that the companys minimum required rate of return on operating assets is 15% and that performance is evaluated 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. (Omit the "$" sign in your response.) |
Residual income | |
Present | $ |
New product line alone | $ |
Total | $ |
b. | Under these circumstances, if you were in Fred Halloway's position would you accept or reject the new product line? | ||||
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