Colt Division had the following results for the year just ended: Sales..................................$750,000 Contribution margin ..................300,000 Controllable margin..................$60,000

Question:

Colt Division had the following results for the year just ended:
Sales..................................$750,000
..................300,000
Controllable margin..................$60,000
Average operating assets............300,000
Colt is considering a new product line that would involve the following:
Sales..................................$150,000
....................60,000
Controllable margin..................$12,000
Average operating assets..............75,000
Colt's parent company, North Inc., has a company-wide ROI of 14% and pays bonuses based on divisional ROI.
Instructions
(a) Determine the effect on Colt's ROI if it introduces the new product line. Would Colt's managers be encouraged to introduce the new product line?
(b) Determine the effect on North Inc.'s ROI if Colt introduces the new product line. Would the top managers of North Inc. want to introduce the new product line?
(c) Assume a required rate of return of 10% on operational assets invested in each division. Determine the effect on Colt's residual income if it introduces the new product. Would Colt's managers be encouraged to introduce the new product?
Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...