Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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
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 $ 23,600,000 Variable expenses 13,000,000 Contribution margin 10,600,000 Fixed expenses 8,594,000 Net operating income $ 2,006,000 Divisional operating assets $ 5,900,000 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 $2,980,000. The cost and revenue characteristics of the new product line per year would be as follows: Sales $ 8,940,000 Variable expenses 65% of sales Fixed expenses $ 2,521,080 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 % 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 $
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started