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“I know headquarters wants us to add that new product line,” said Fred Halloway, manager  NF


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 company’s East Division for last year are given below:


     
  Sales $ 22,800,000  
  Variable expenses   13,000,000  
 

  Contribution margin   9,800,000  
  Fixed expenses   8,067,200  
 

  Net operating income $ 1,732,800  
 



  Divisional operating assets $ 5,700,000  
 





The company had an overall ROI of 18% last year (considering all divisions). The company’s East Division has an opportunity to add a new product line that would require an investment of $2,750,000. The cost and revenue characteristics of the new product line per year would be as follows:


   
  Sales $ 7,975,000  
  Variable expenses 65% of sales  
  Fixed expenses $ 2,217,050  

   
Required:
1.

Compute the East Division’s ROI for last year; also compute the ROI as it would appear if the company performed the same as last year and added the new product line. (Do not round intermediate percentage values. Round other intermediate calculations and final answers to 2 decimal places.)


          ROI
  Present  %  
  New product line alone  %  
  Total  %  


2. If you were in Fred Halloway’s position, would you accept or reject the new product line?
 
 

Accept
Reject
3. Why do you suppose headquarters is anxious for the East Division to add the new product line?
   
 
Adding the new line would increase the company's overall ROI.
Adding the new line would decrease the company's overall ROI.

4. Suppose that the company’s minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income.

a. Compute the East Division’s residual income for last year; also compute the residual income as it would appear if the company performed the same as last year and added the new product line.

  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?
   
 
Accept
Reject

 
BB
i am willing to pay 10.00 USD for this help.  [negotiable]
this question is about Accounting
due March 23 2014


posted :March 22 2014

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