(Adapted from National Association of Accountants, Research Report No. 35, p. 34
ID: 2547776 • Letter: #
Question
(Adapted from National Association of Accountants, Research Report No. 35, p. 34) PROBLEM 1 know 11-18 Return on Investment (ROI) and Residual Income [L011-1, LO11 w headquarters wants us to add that new product line," said Dell Havasi, manager -21 of Billings s Office Products Division. "But I want to see the numbers before I make any move s return on investment (ROI) has led the company for three years, and I don't want any letdown. Billings Company is a decentralized wholesaler with five autonomous divisions. The divi- ons are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROls. Operating results for the company's Office Products Division for the most recent year are given below: Sales . Variable expenses $10,000,000 6,000,000 4,000,000 3,200,000 800,000 Net operating income . . The company had an overall return on investment (ROI) of 15% last year (considering all divisions). The Office Products Division has an opportunity to add a new product line that would require an additional investment in operating assets of $1,000,000. The cost and revenue character- istics of the new product line per year would be: Sales Variable expenses $2,000,000 60% of sales 640,000Explanation / Answer
2. Since, ROI in % has decreased from 20% to 19.20%, new product line should be rejected.
3. It seems that Headquarter is anxious to add new product line due to additional ROI of $ 160000 per year.
4.
a. Residual Income = ($ 40,00,000 × 0.12) + $ 160000 = $ 480000 + $ 160000 = $ 640000
b. ROI in %= ($ 640000×100)/ ($4000000+$1000000) = $ 64000000/$ 5000000 = 12.80%
Since 12.80% (ROI) is greater then 12.00% (Minimum required rate of Return), So new product line should be accepted.
Particulars $ Sales 2000000 Less: Variable Exp. (60% Of Sales) 1200000 Contribution 800000 Less: Fixed Exp. 640000 Net Income from New Product 160000 1 ROI in % of most recent year = $ 800000/Divisional Operating Assets = $ 800000/$ 4000000 = 20% ROI in $ (If new product is added) = Net Operating Income ofOffice Product Division + Net Income from New Product = $ 800000 (Given) + $ 160000 = $960,000 ROI in % = ($ 960000×100)/$(4000000+1000000) = $ 96000000/$5000000 = 19.20%Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.