Maurice Tutor

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    Argosy University/ Phoniex University/
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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 15 Oct 2017 My Price 9.00

Fred Halloway,

Ac€A?I know headquarters wants us to add that new product line,Ac€?? said Fred Halloway, manager of Kirsi ProductsAc€?c East Division. Ac€A?But I want to see the numbers before I make a move. Our divisionAc€?cs return on investment (ROI) has led the company for three years, and I donAc€?ct want any letdown.Ac€??

     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 companyAc€?cs East Division for last year are given below:
     
  Sales $ 22,800,000
  Variable expenses   13,000,000
     
  Contribution margin   9,800,000
  Fixed expenses   8,044,400
     
  Net operating income $ 1,755,600
     
  Divisional operating assets $ 5,700,000
     
 

The company had an overall ROI of 18% last year (considering all divisions). The companyAc€?cs East Division has an opportunity to add a new product line that would require an investment of $3,110,000. The cost and revenue characteristics of the new product line per year would be as follows:
   
  Sales $ 9,330,000
  Variable expenses 65% of sales
  Fixed expenses $ 2,603,070
 
Required:
 

-Compute the East DivisionAc€?cs 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 %
 
- If you were in Fred HallowayAc€?cs position, would you accept or reject the new product line?
   
 
  Accept
  Reject
- 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.
- Suppose that the companyAc€?cs minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income.
a. Compute the East DivisionAc€?cs 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

 

Answers

Maurice Tutor
(5)
Status NEW Posted 15 Oct 2017 03:10 PM My Price 9.00

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