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:
| Net operating|
| Divisional operating|
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:
-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.)
| New product line|
|-||If you were in Fred HallowayAc??cs|
position, would you accept or reject the new product line?
|-||Why do you suppose headquarters|
is anxious for the East Division to add the new product line?
|-||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.
| New product line|
|b.||Under these circumstances, if|
you were in Fred Halloway's position would you accept or reject the
new product line?
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