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(Solution Download) Ac?A?I know headquarters wants us to add that new product line,Ac??? said Fred Halloway, manager


 

 

 

 

 

 

 

Ac?A?I know headquarters wants us to add that new product line,Ac???

 

said Fred Halloway, manager of Kirsi ProductsAc??c East Division. Ac?A?But

 

I want to see the numbers before I make a move. Our divisionAc??cs

 

return on investment (ROI) has led the company for three years, and

 

I donAc??ct want any letdown.Ac???

 

 

 

 

 

 

 

 

 

     Kirsi Products is a decentralized

 

wholesaler with four autonomous divisions. The divisions are

 

evaluated on the basis of ROI, with year-end bonuses given to

 

divisional managers who have the highest ROI. Operating results for

 

the companyAc??cs East Division for last year are given below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Sales$22,800,000
  Variable

 

expenses

13,000,000
  Contribution

 

margin

9,800,000
  Fixed expenses8,044,400
  Net operating

 

income

$1,755,600
  Divisional operating

 

assets

$5,700,000

 

 

 

 

 

 

 

 

The company had an overall ROI of 18% last year (considering all

 

divisions). The companyAc??cs East Division has an opportunity to add a

 

new product line that would require an investment of $3,110,000.

 

The cost and revenue characteristics of the new product line per

 

year would be as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Sales$

 

9,330,000

  Variable

 

expenses

65% of

 

sales

  Fixed expenses$

 

2,603,070

 

 

 

 

 

 

 

 

 

 

 

 

Required:

 

-Compute the East DivisionAc??cs ROI for last year; also compute the

 

ROI as it would appear if the company performed the same as last

 

year and added the new product line. (Do not round

 

intermediate percentage values. Round other intermediate

 

calculations and final answers to 2 decimal places.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        ROI

  Present%
  New product line

 

alone

%
  Total%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-If you were in Fred HallowayAc??cs

 

position, would you accept or reject the new product line?

 

 

 

 

 

 

 

 

 

 

 

 

Accept
Reject

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-Why do you suppose headquarters

 

is anxious for the East Division to add the new product line?

 

 

 

 

 

 

 

 

 

 

 

 

Adding the new line would increase

 

the company's overall ROI.

Adding the new line would decrease

 

the company's overall ROI.

 

 

 

 

 

 

 

 

 

-Suppose that the companyAc??cs

 

minimum required rate of return on operating assets is 15% and that

 

performance is evaluated using residual income.

 

 

 

 

 

 

 

 

a.Compute the East DivisionAc??cs

 

residual income for last year; also compute the residual income as

 

it would appear if the company performed the same as last year and

 

added the new product line.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residual

 

income

  Present

 

$         

  New product line

 

alone

 

$         

  Total

 

$         

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

b.Under these circumstances, if

 

you were in Fred Halloway's position would you accept or reject the

 

new product line?

 

 

 

 

 

 

 

 

 

 

 

 

Accept
Reject

 

 


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