I know headquarters wants us to add that new product line, said Fred Halloway, manager of Kirsi
Question:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $21,000,000
Variable expenses . . . . . . . . . . . . . . . 13,400,000
Contribution margin . . . . . . . . . . . . . . 7,600,000
Fixed expenses . . . . . . . . . . . . . . . . . . 5,920,000
Net operating income . . . . . . . . . . . . $ 1,680,000
Divisional operating assets. . . . . . . . $ 5,250,000
The company had an overall ROI of 18% last year (considering all divisions). The company’s East Division has an opportunity to add a new product line that would require an investment of $3,000,000. The cost and revenue characteristics of the new product line per year would be as follows:
Sales . . . . . . . . . . . . . . . . . $9,000,000
Variable expenses . . . . . . . 65% of sales
Fixed expenses. . . . . . . . . . $2,520,000
Required:
1. Compute the East Division’s ROI for last year; also compute the ROI as it would appear if the new product line is added.
2. If you were in Fred Halloway’s position, would you accept or reject the new product line? Explain.
3. Why do you suppose headquarters is anxious for the East Division to add the new product line?
4. Suppose that the company’s minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income.
a. Compute the East Division’s residual income for last year; also compute the residual income as it would appear if the new product line is added.
b. Under these circumstances, if you were in Fred Halloway’s position would you accept or reject the new product line? Explain.
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...
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Managerial Accounting
ISBN: 9780073526706
12th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
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