Problem 3 - Performance Evaluation (17 marks) Mifflin, Co. is a decentralized wholesaler with five autonomous...

 

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Problem 3 - Performance Evaluation (17 marks) Mifflin, Co. is a decentralized wholesaler with five autonomous divisions. Operating results for the company's Sportswear Division for this year are given below: Sales Variable expenses Contribution margin Fixed expenses Net operating income $ $ Divisional average operating assets $ Sales Variable expenses Fixed expenses 168,000 115,000 23,000 75,000 Next year the Sportswear Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $29,000. The cost and revenue characteristics of the new product line per year would be: $67,000 60% of sales $17,000 Required: 1. Suppose the divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIS. a. Compute the Sportswear Division's margin, turnover, and ROI for this year. (3 marks) b. Compute the Sportswear Division's margin, turnover, and ROI for the new product line by itself. (3 marks) c. Compute the Sportswear Division's margin, turnover, and ROI for next year assuming that it performs the same as this year and adds the new product line. (3 marks) d. Using the ROI approach, if you were the division manager of Sportswear Division, would you accept or reject the new product line? Briefly explain why. (1 mark) 2. Suppose that the company's minimum required rate of return on operating assets is 18% and that division performance is evaluated using residual income. a. Compute the Sportswear Division's residual income for this year. (2 marks) b. Compute the Sportswear Division's residual income for the new product line by itself. (2 marks) c. Compute the Sportswear Division's residual income for next year assuming that it performs the same as this year and adds the new product line. (2 marks) d. Using the residual income approach, if you were the division manager of Sportswear Division, would you accept or reject the new product line? Briefly explain why. (1 mark) Problem 3 - Performance Evaluation (17 marks) Mifflin, Co. is a decentralized wholesaler with five autonomous divisions. Operating results for the company's Sportswear Division for this year are given below: Sales Variable expenses Contribution margin Fixed expenses Net operating income $ $ Divisional average operating assets $ Sales Variable expenses Fixed expenses 168,000 115,000 23,000 75,000 Next year the Sportswear Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $29,000. The cost and revenue characteristics of the new product line per year would be: $67,000 60% of sales $17,000 Required: 1. Suppose the divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIS. a. Compute the Sportswear Division's margin, turnover, and ROI for this year. (3 marks) b. Compute the Sportswear Division's margin, turnover, and ROI for the new product line by itself. (3 marks) c. Compute the Sportswear Division's margin, turnover, and ROI for next year assuming that it performs the same as this year and adds the new product line. (3 marks) d. Using the ROI approach, if you were the division manager of Sportswear Division, would you accept or reject the new product line? Briefly explain why. (1 mark) 2. Suppose that the company's minimum required rate of return on operating assets is 18% and that division performance is evaluated using residual income. a. Compute the Sportswear Division's residual income for this year. (2 marks) b. Compute the Sportswear Division's residual income for the new product line by itself. (2 marks) c. Compute the Sportswear Division's residual income for next year assuming that it performs the same as this year and adds the new product line. (2 marks) d. Using the residual income approach, if you were the division manager of Sportswear Division, would you accept or reject the new product line? Briefly explain why. (1 mark)