Yee Ltd is a decentralized company with four divisions The divisions are evaluated on ROI, with bonuses given to divisional managers with the highest ROI figures The companys X Division has operating assets of $5,250,000 Operating results for the Division for 2004 are as follows Sales $21,000,000 Less Variable cost $13,400,000 Contribution Margin $7, 600,000 Less Fixed Expenses $5,920,000 Net Profit $1, 680,000 Operating Assets $5,250,000 Yee Ltd had an overall ROI of 18 for 2004 X Division has an opportunity to add a new product line that would require an investment of $3,000,000 Details relating to the new investment are as follows Sales $9,000,000 Variable expenses 65 of sales Fixed expenses $2,520,000 Required a) Compute X Divisions ROI for 2004 What would its ROI be if the new product line is added Without doing any computations, would the manager of X Division be willing to add the new product line b) Why do you think that the company is anxious for X Division to add the new product line c) Suppose the company decides to evaluate its divisional managers based on EVA The companys minimum required rate of return is 15 The tax rate is 20 Compute the EVA of the new product line Would the manager of X Division be willing to add the new product line d) The manager of X Division is considering the disposal of obsolete inventory and reduction of advertising and repairs to machinery Comment on the effectiveness of these actions on net income of X Division

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Yee Ltd is a decentralized company with four divisions. The divisions are evaluated on ROI, with bonuses given to divisional managers with the highest ROI

Yee Ltd is a decentralized company with four divisions. The divisions are evaluated on ROI, with bonuses given to divisional managers with the highest ROI figures.

The companys X Division has operating assets of $5,250,000. Operating results for the Division for 2004 are as follows:

Sales - $21,000,000

Less:Variable cost - $13,400,000

Contribution Margin - $7,600,000

Less: Fixed Expenses - $5,920,000

Net Profit - $1,680,000

Operating Assets - $5,250,000

Yee Ltd had an overall ROI of 18% for 2004. X Division has an opportunity to add a new product line that would require an investment of $3,000,000. Details relating to the new investment are as follows:

Sales - $9,000,000 Variable expenses - 65% of sales

Fixed expenses - $2,520,000

Required:

a) Compute X Divisions ROI for 2004. What would its ROI be if the new product line is added? Without doing any computations, would the manager of X Division be willing to add the new product line?
b) Why do you think that the company is anxious for X Division to add the new product line?
c) Suppose the company decides to evaluate its divisional managers based on EVA. The companys minimum required rate of return is 15%. The tax rate is 20%. Compute the EVA of the new product line. Would the manager of X Division be willing to add the new product line?
d) The manager of X Division is considering the disposal of obsolete inventory and reduction of advertising and repairs to machinery. Comment on the effectiveness of these actions on net income of X Division.