\"I know headquarters wants us to add that new product line,\" said Fred Hallowa
ID: 2453577 • 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 ROl, 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 $ 29,000,000 Variable expenses 14,000,000 Contribution margin 15,000,000 Fixed expenses Net operating income Divisional operating assets 12,622,000 $ 2,378,000 $ 5,800,000 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 $3,200,000. The cost and revenue characteristics of the new product line per year would be as follows Sales Variable expenses Fixed expenses $ 9,600,000 65% of sales $ 2,697,600 Required: 1. Compute the East Division's ROl for last year; also compute the ROl 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's position, would you accept or reject the new product line? Accept O RejectExplanation / Answer
1 a.
New investment:
Combined ROI = (662,400+2,378,00) / (3,200,000+5,800,000) = 34%
2 - Reject since it reduces the overal ROI of the East division
3. Adding the new line would reduce the overall ROI of the company
4. Residual Income:
Present :
New Line:
Combined = 3,040,400
Present ROI on the East division: Sales 29,000,000 Less: Variable expenses 14,000,000 Less: Fixed expenses 12,622,000 Net operating income 2,378,000 Investment 5,800,000 ROI 41%Related Questions
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