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The ROI of 30% is higher than the company-wide desired ROI but far below the ROI currently being earned by the backpack division. This may result in the manager choosing not to produce the new line, a condition known as "suboptimization". To avoid this, Residual Income should be calculated: Operating Income - (Operating assets X Desired ROI) = Residual Income Calculate the Residual Income for the backpack division before investing the $300,000 : Next, calculate the new overall ROI for the backpack division if the $300,000 is invested: Now, calculate the new operating assets if the $300,000 is invested: Calculate the new ROI: ROI=OperatingAssetsOperatingIncome==% Investing in the new line would lower the backpack divisions ROI. However, the company should focus on Residual Income in making this decision: Should the backpack division adopt the new line of backpacks, Yes or No? EXERCISE 1 Responsibility Report: Peak Outdoors produces and sells hiking gear. The production department reported the following information regarding its unique line of backpacks. Included are the static budget and actual results for the most recent year. Prepare a Flexible Budget for Peak based on the information above. To do so, you must first determine the cost per unit data of the Static Budget: Remember that Total Fixed Manufacturing Overhead does not fluctuate with units produced, so the difference in the Static and Actual amounts is purely a Spending Variance. Now, use the per unit budgeted amounts to prepare a Flexible Budget (Actual units X Budget per unit) and calculate variances (Responsibility Report). Be sure to interpret each variance as either Favorable (F) or Unfavorable (U). EXERCISE 4: Suppose that Peak's management has some doubts that the manager of the backpack division can actually earn a 30% ROI on the new line of backpacks and also that the invested assets needed to produce the new backpacks would actually be $350,000. Go back to the original assumptions but revise the expected ROI from 30% to 27% and the invested assets from $300,000 to $350,000. Would these new estimates change the company's decision about producing the new line? Calculate the new overall ROI for the backpack division if the $350,000 is invested: Now, calculate the new operating assets if the $350,000 is invested: Calculate the new overall ROI: ROI=OperatingAssetsOperatingIncome==% Next, calculate the Residual Income: Should the backpack division adopt the new line of backpacks, Yes or No? EXERCISE 2 Return on Investment (ROI): Measures the level of operating income generating on the company's invested assets. Even though the current year's Responsibility Report indicates some unfavorable variances (previous pag). The backpack division at Peak Outdoors historically has delivered a positive Return on Investment (ROI) for Peak's overall operations. Calculate the current year's ROI for the backpack division using the following information: Using the expanded ROI formula: The first calculation (Operating Income / Sales) represents the operating margin for the business and shows that total ROI can be increased by reducing expenses thereby increasing Operating Income. The second calculation (Sales / Operating Assets) is a turnover ratio which measures how efficiently Peak is using its operating assets in generating Sales. For instance, ROI would increase if Peak could produce the same (or better) sales while utilizing less assets to generate those sales. The ROI formula can also be simplified as follows: ROI=OperatingAssetsOperatingIncome EXERCISE 3 Residual Income: Measures the ability to maximize earnings above some targeted level. Company-wide, Peak Outdoor's Return on Investment (ROI) is approximately 25%. The backpack division consistently outperforms expectations (average ROI of 35% ). However, assume that the production manager of the backpack division is presented with the opportunity to invest $300,000 of the company's assets to produce a new line of super-light-weight backpacks. The manager expects the backpack division to earn an ROI of approximately 30% on this new product. The ROI of 30% is higher than the company-wide desired ROI but far below the ROI currently being earned by the backpack division. This may result in the manager choosing not to produce the new line, a condition known as "suboptimization". To avoid this, Residual Income should be calculated: Operating Income - (Operating assets X Desired ROI) = Residual Income Calculate the Residual Income for the backpack division before investing the $300,000 : Next, calculate the new overall ROI for the backpack division if the $300,000 is invested: Now, calculate the new operating assets if the $300,000 is invested: Calculate the new ROI: ROI=OperatingAssetsOperatingIncome==% Investing in the new line would lower the backpack divisions ROI. However, the company should focus on Residual Income in making this decision: Should the backpack division adopt the new line of backpacks, Yes or No? EXERCISE 1 Responsibility Report: Peak Outdoors produces and sells hiking gear. The production department reported the following information regarding its unique line of backpacks. Included are the static budget and actual results for the most recent year. Prepare a Flexible Budget for Peak based on the information above. To do so, you must first determine the cost per unit data of the Static Budget: Remember that Total Fixed Manufacturing Overhead does not fluctuate with units produced, so the difference in the Static and Actual amounts is purely a Spending Variance. Now, use the per unit budgeted amounts to prepare a Flexible Budget (Actual units X Budget per unit) and calculate variances (Responsibility Report). Be sure to interpret each variance as either Favorable (F) or Unfavorable (U). EXERCISE 4: Suppose that Peak's management has some doubts that the manager of the backpack division can actually earn a 30% ROI on the new line of backpacks and also that the invested assets needed to produce the new backpacks would actually be $350,000. Go back to the original assumptions but revise the expected ROI from 30% to 27% and the invested assets from $300,000 to $350,000. Would these new estimates change the company's decision about producing the new line? Calculate the new overall ROI for the backpack division if the $350,000 is invested: Now, calculate the new operating assets if the $350,000 is invested: Calculate the new overall ROI: ROI=OperatingAssetsOperatingIncome==% Next, calculate the Residual Income: Should the backpack division adopt the new line of backpacks, Yes or No? EXERCISE 2 Return on Investment (ROI): Measures the level of operating income generating on the company's invested assets. Even though the current year's Responsibility Report indicates some unfavorable variances (previous pag). The backpack division at Peak Outdoors historically has delivered a positive Return on Investment (ROI) for Peak's overall operations. Calculate the current year's ROI for the backpack division using the following information: Using the expanded ROI formula: The first calculation (Operating Income / Sales) represents the operating margin for the business and shows that total ROI can be increased by reducing expenses thereby increasing Operating Income. The second calculation (Sales / Operating Assets) is a turnover ratio which measures how efficiently Peak is using its operating assets in generating Sales. For instance, ROI would increase if Peak could produce the same (or better) sales while utilizing less assets to generate those sales. The ROI formula can also be simplified as follows: ROI=OperatingAssetsOperatingIncome EXERCISE 3 Residual Income: Measures the ability to maximize earnings above some targeted level. Company-wide, Peak Outdoor's Return on Investment (ROI) is approximately 25%. The backpack division consistently outperforms expectations (average ROI of 35% ). However, assume that the production manager of the backpack division is presented with the opportunity to invest $300,000 of the company's assets to produce a new line of super-light-weight backpacks. The manager expects the backpack division to earn an ROI of approximately 30% on this new product