question archive "I know headquarters wants us to add that new product line," said Fred Holloway, manager of KristiProducts' West Division
"I know headquarters wants us to add that new product line," said Fred Holloway, manager of KristiProducts' West Division
Subject:AccountingPrice: Bought3
"I know headquarters wants us to add that new product line," said Fred Holloway, manager of KristiProducts' West Division. "But I want to see the numbers before I make a move. Our division'sreturn on investment (ROI) has led the company for three years, and I don't want any letdown."Kristi Products is a decentralized wholesaler with four autonomous divisions. The divisions areevaluated on the basis of ROI, with year-end bonuses given to divisional managers who have thehighest ROI. Operating results for the company's West Division for the last year are given below:
Sales............................ $21,000,000
Variable expenses............. 13,400,000
Contribution margin.......... 7,600,000
Fixed expenses................ 5,920,000
Net Operating Income........ $ 1,680,000
Divisional Operating Assets. $ 5,250,000
The company had an overall ROI of 18% last year (considering all divisions). The company's West division has an opportunity to add a new product line that would require an investment of$3,000,000. The cost and revenue characteristics of the new product line per year would be as follows:
Sales........................... $9,000,000
Variable expenses............ 65% of sales
Fixed expenses............... $2,520,000
Required:
1. (2 points) Compute the West Division's ROI for last year; also compute the ROI as itwould appear if the company duplicated the same performance as last year and also addedthe new product line.
2. (2 points) If you were in Fred Holloway's position, would you accept or reject the new product line? Explain.
3. (2 points) Why do you suppose headquarters is anxious for the West Division to add thenew product line?
4. Suppose that the company's minimum required rate of return on operating assets is 15% and that the performance is evaluated using residual income.
a. (2 points) Compute the West Division's residual income for the last year; also computethe residual income as it would appear if the company duplicated the same performanceas last year and also added the new product line.
b. (2 points) Under these circumstances, if you were in Fred Holloway's position wouldyou accept or reject the new product line? Explain
