Return on Investment The company executives want to add a new product line, but the manager of the South Division wants
Posted: Wed Jul 06, 2022 6:25 am
Return on Investment
The company executives want to add a new product line, but themanager of the South Division wants to see the numbers beforemaking a decision. The division’s return on investment (ROI) hasled the company for 3 years, and she believes that shouldcontinue.
The company is a decentralized wholesaler with 4 autonomousdivisions. The divisions are evaluated on the basis of ROI, withyear-end bonuses given to the divisional managers who have thehighest ROIs. Operating results for the company’s South Divisionfor this year are given below:
Sales $ 22,440,000
Variable expenses 14,094,600
Contribution margin 8,345,400
Fixed expenses 6,130,000
Net operating income $ 2,215,400
Divisional average operating assets $ 4,480,000
The company had an overall return on investment (ROI) of 18.00%this year (considering all divisions). Next year the South Divisionhas an opportunity to add a new product line that would require anadditional investment that would increase average operating assetsby $2,430,600. The forecasted cost and revenue of the new productline per year would be:
Sales $9,705,000
Variable expenses 65% of sales
Fixed expenses $2,591,710
Required:
1.Compute the South Division’s margin, turnover, and ROI forthis year.
2.Compute the South Division’s margin, turnover, and ROI for thenew product line by itself.
3.Compute the South Division’s margin, turnover, and ROI fornext year assuming that it performs the same as this year and addsthe new product line.
4.If you were in the manager’s position, would you accept orreject the new product line?
5.Why do you suppose headquarters is anxious for the SouthDivision to add the new product line?
6.Suppose that the company’s minimum required rate of return onoperating assets is 15% and that performance is evaluated usingresidual income.
A. Compute the South Division’s residual income for thisyear.
B. Compute the South Division’s residual income for the newproduct line by itself.
C. Compute the South Division’s residual income for next yearassuming that it performs the same as this year and adds the newproduct line.
D. Using the residual income approach, if you were in themanager’s position, would you accept or reject the new productline? Explain your answer.
The company executives want to add a new product line, but themanager of the South Division wants to see the numbers beforemaking a decision. The division’s return on investment (ROI) hasled the company for 3 years, and she believes that shouldcontinue.
The company is a decentralized wholesaler with 4 autonomousdivisions. The divisions are evaluated on the basis of ROI, withyear-end bonuses given to the divisional managers who have thehighest ROIs. Operating results for the company’s South Divisionfor this year are given below:
Sales $ 22,440,000
Variable expenses 14,094,600
Contribution margin 8,345,400
Fixed expenses 6,130,000
Net operating income $ 2,215,400
Divisional average operating assets $ 4,480,000
The company had an overall return on investment (ROI) of 18.00%this year (considering all divisions). Next year the South Divisionhas an opportunity to add a new product line that would require anadditional investment that would increase average operating assetsby $2,430,600. The forecasted cost and revenue of the new productline per year would be:
Sales $9,705,000
Variable expenses 65% of sales
Fixed expenses $2,591,710
Required:
1.Compute the South Division’s margin, turnover, and ROI forthis year.
2.Compute the South Division’s margin, turnover, and ROI for thenew product line by itself.
3.Compute the South Division’s margin, turnover, and ROI fornext year assuming that it performs the same as this year and addsthe new product line.
4.If you were in the manager’s position, would you accept orreject the new product line?
5.Why do you suppose headquarters is anxious for the SouthDivision to add the new product line?
6.Suppose that the company’s minimum required rate of return onoperating assets is 15% and that performance is evaluated usingresidual income.
A. Compute the South Division’s residual income for thisyear.
B. Compute the South Division’s residual income for the newproduct line by itself.
C. Compute the South Division’s residual income for next yearassuming that it performs the same as this year and adds the newproduct line.
D. Using the residual income approach, if you were in themanager’s position, would you accept or reject the new productline? Explain your answer.