Reference no: EM132724430
Alyssa Company is a decentralized company with five autonomous divisions. Operating results for the company's Division A are given below:
Sales P24,500,000
Less: Variable costs 14,700,000
Contribution margin 9,800,000
Less: Fixed costs 8,000,000
Net operating income P 1,800,000
The company had an overall ROI of 24% last year. Division A used an investment of P6,000,000 at the start of the year. Division A has an opportunity to add a new product line that would require an investment of P4,000,000.
The cost and revenue characteristics of the new product line per year would be:
Sales P 8,000,000
Variable costs 60% of sales
Fixed costs P 2,240,000
Required:
Problem 1. Compute Division A's ROI for last year.
Problem 2. Compute Division A's ROI if the new product is added.
Problem 3. If you were Division A's manager, would you accept the new product line?
Problem 4. If you were the Chief Executive Officer (CEO) of Alyssa Company, would you advise Division A manager to add the new product line?
Problem 5. Suppose that the company sets a minimum return of 20% on its invested assets, and that the divisional performance is evaluated using the residual income approach:
a. Determine the residual income of Division A last year and its new residual income if the new product line is accepted.
b. Under these circumstances, if you are the Division A manager, would you accept the new product line?
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