“I know headquarters wants us to add that new product line,” said Fred Halloway,
ID: 1196918 • Letter: #
Question
“I know headquarters wants us to add that new product line,” said Fred Halloway, manager of Kirsi Products’ East Division. “But I want to see the numbers before I make a move. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.”
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:
The company had an overall ROI of 17.00% 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 $2,400,000. The cost and revenue characteristics of the new product line per year would be as follows:
Compute the East Division’s ROI for last year; also compute the ROI as it would appear if the new product line is added. (Round your intermediate calculations and the "Turnover", "ROI" answers and "Margin" answers to 2 decimal places.)
rev: 12_09_2013_QC_42100, 06_30_2014_QC_50911, 07_14_2014_QC_50911, 08_01_2014_QC_50911, 08_20_2014_QC_50911
References
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:
Explanation / Answer
Computation of East division's ROI:
ROI = Net operating income/Divisional Operating assets
=2,153,200/4,625,000
=46.56%
New product line:
Operating income = Sales - Variable costs - Fixed costs
= 9,600,000 - 6,240,000 - 2,582,400 = 777,600
ROI of new product line = 777,600 / 2,400,000 = 32.4%
Total ROI = (2,153,200 + 777,600) / (4,625,000 + 2,400,000) =
= 2,930,800 / 7025000 = 41.7%
2. Reject. (Because when new producted added the Total ROI decreases by 4.86% , i.e 46.56 - 42.7)
3. Adding the new line would Increase the company's overall ROI.
4. (a) Present RI = Operating Income - (Operating Assets x Rate of Return on Operating Assets)
= 2,153,200 - (4,625,000 x 14%)
= 1,505,700
New product line RI = 777,600 - (2,400,000 x 14%)
= 441,600
Total RI = 1,505,700 + 441,600 = 1,947,300
(b) Accept.
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