\"I know headquarters wants us to add that new product line,\" said Brian Stettl
ID: 2468566 • Letter: #
Question
"I know headquarters wants us to add that new product line," said Brian Stettler, manager of Sparks Products' Central 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. Sparks 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 ROl. Operating results for the company's Central Division for last year are given below: Sales Variable expenses $ 22,700,000 14,445,455 Contribution margin Fixed expenses 8,254,545 6,314,000 Net operating income $ 1,940,545 Divisional operating assets $ 5,675,000 The company had an overall ROI of 13% last year (considering all divisions). The company's Central Division has an opportunity to add a new product line that would require an investment of $3,570,000. The cost and revenue characteristics of the new product line per year would be as follows: Sales Variable expenses Fixed expenses $10,640,000 65% of sales $ 2,940,910Explanation / Answer
ROI = net income / Average operating assets
Present
34.19%
New product line
21.94%
total
29.46%
No
Adding the new line would decrease the company’s overall ROI
A) Residual income = Net income – ( Average operating asset * minimum required return)
Residual income
Present
$1,202,795
New product line
318,990
total
1,521,785
Present
34.19%
New product line
21.94%
total
29.46%
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