banner
  • Fred Holloway - ROI and Residual Income
tab-top
Admin

Fred Holloway - ROI and Residual Income - 3 Jul, 2012

Problem 9-14A, Return on Investment (ROI) and Residual Income

"I know headquarters wants us to add that new product line," said Fred Holloway, manager of Krisi Products' East Division. "But I want to see the numbers before I make a movie. Our division's return on investment (ROI) has let the company for three years, and I don't want any letdown."

Krisi Products is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the highest ROI. Operating results for the company's East Division for the last year are given below:

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

1. Compute the East Division's ROI for the last year; also compute the ROI as it would appear if the company performed the same as last year and added the new product line.

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 the last year; also compute the residual income as it would appear if the company performed the same as last year and added the new product line.

b. Under these circumstances, if you were in Fred Halloway's position would you accept or reject the new product line? Explain.



Category : Management Accounting

Search Keywords :
Fred , Holloway , Krisi , East , Division , Roi , Residual , Income , Return , Investment 


Downloaded :
13


Answer  - 3 Jul, 2012
Please see the doc attachment....


Credits can be purchased using Manage Credits option after log in
tab-bottom