Maurice Tutor

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

Category > Accounting Posted 11 Aug 2017 My Price 13.00

Kirsi Products

%u201CI know headquarters wants us to add that new product line,%u201D said Fred Halloway, manager of Kirsi Products%u2019 East Division. %u201CBut I want to see the numbers before I make a move. Our division%u2019s return on investment (ROI) has led the company for three years, and I don%u2019t want any letdown.%u201D

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%u2019s East Division for last year are given below:

 

     
Sales $ 22,950,000
Variable expenses   13,000,000
 
Contribution margin   9,950,000
Fixed expenses   8,022,200
 
Net operating income $ 1,927,800
 
Divisional operating assets $ 5,100,000
 

 

The company had an overall ROI of 18% last year (considering all divisions). The company%u2019s East Division has an opportunity to add a new product line that would require an investment of $3,100,000. The cost and revenue characteristics of the new product line per year would be as follows:

 

   
Sales $ 9,300,000
Variable expenses 65% of sales
Fixed expenses $ 2,613,300
Required:
1.

Compute the East Division%u2019s 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 %

 

2. If you were in Fred Halloway%u2019s 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%u2019s minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income.

 

a. Compute the East Division%u2019s 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 $

 

Answers

Maurice Tutor
(5)
Status NEW Posted 11 Aug 2017 10:08 PM My Price 13.00

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