I know headquarters wants us to add that new product in the sales line, said Jason, manage
Fantastic news! We've Found the answer you've been seeking!
Question:
"I know headquarters wants us to add that new product in the sales line," said Jason, manage of Silver Steel Company's Sales Division. "But I want to see the numbers before I make any move. Our division's return on investment ROI has been the highest in the company for lat three years, and I don't want to lose this position."
Silver Steel Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated on the basis of ROI, with yearend bonuses given to the divisional managers who have the highest Rols. Operating results for the company's Sales Division for
this year are given below:
Sales revenue
$
Variable costs
Contribution margin
Traceable fixed costs
Net operating income
Average operating assets
The company had an overall return on investment ROI of this year considering all divisions Next year the Sales Division has an opportunity to add a new product to sales line that would require an additional investment which will increase average operating assets by $ The cost and revenue characteristics of the new Sales line per year would be:
Sales revenue
$
Variable expenses
of sales
Fixed expenses
$
Required:
Compute the following in terms of ROI.
a Compute the Sales Division's ROI for this year.
b Compute the Sales Division's ROI for the new Sales line by itself.
c Compute the Sales Division's ROI for next year assuming that it performs the same as this year and adds the new Sales line.
Suppose that the company's minimum required rate of return on operating assets is and that performance is evaluated using residual income RI Calculate the following in view of residual income.
a Compute the Sales Division's residual income for this year.
b Compute the Sales Division's residual income for the new Sales line by itself.
c Compute the Sales Division's residual income for next year assuming that it performs the same as this year and adds the new Sales line.
If you were in Jason's position, would you accept or reject the new Sales line, considering ROI, and considering residual income model? Explain.
F
Related Book For
Managerial Accounting
ISBN: 9780073526706
12th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
Posted Date: