Consumer Services Division is one part of The division ex pects this level of pe
ID: 2523578 • Letter: C
Question
Consumer Services Division is one part of The division ex pects this level of per formance to continue for Year 2.Senior service line that would result in the following revenues and costs Vargas Corporation. The Consumer Services Division reported income of $112,000 on an investment in operating assets of $800000 for Year 1 management of Vargas Car par ation has askand the Consumer Services Division to consider adding anew Revenues Variable expenses Direct fixed expenses Average operating assets 240,000 110,000 70,000 500,000 Required: 1) Compute the ROl that would be generate d by the new product line 2) Compute the ROl for the Consumer Service s Division without the new product line 3) Compute the Consumer Services Division's residual income without the ne w product line and with the new product line. The target ROI is 115 4) would the new product lire benefit the company as a whoe? ROfo-the company asa whole is 10%, wa the Consumer Servees Oven ikely the new product tne given the company suse of ROI as s performancemessure? Why or why not? which performance ev slustion mesure wll more likely motvare the division mansger to do what is best for the compsny s who e?Explanation / Answer
1.Return on investment on new product line
Net benefit =240000-110000-70000 =60000
Investment = 500000
ROI = 60000/500000*100 = 12%
2.ROI OF Consumer service division
Net income = 112000
Investment on assets = 800000
ROI = 112000/800000*100 = 14%
3.Residual income of consumer service division
.Without new product line
= 112000-(800000*14/100) = 0
.With new product line
= 112000+60000-(800000*14%+500000*12%)
= 0
4.There is no additional residual income from new product line
Based on 10%
Without new product line
=112000-(800000*10%) = 32000 residual income
With new product line
= 60000-(500000*10%) = 10000 residual income
Note: so measure of ROI at 10% is useful at with new product line or without new product line
On existing is higher at 32000
On new at 10000.
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