South division had the following results for the year just ended:
Sales..................................$1,500,000
Contribution margin.....................600,000
Controllable margin...................$120,000
Average operating assets...............600,000
South is considering a new product line that would involve the following:
Sales.....................................$300,000
Contribution margin......................120,000
Controllable margin......................$24,000
Average operating assets...............150,000
South's parent company, Globe Inc., has a company-wide ROI of 14% and pays bonuses based on divisional ROI.
Instructions
(a) Determine the effect on South's ROI if it introduces the new product line. Would South's managers be encouraged to introduce the new product line?
(b) Determine the effect on Globe Inc.'s ROI if South introduces the new product line. Would the top managers of Globe 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 South's residual income if it introduces the new product. Would South's managers be encouraged to introduce the new product line?