Reference no: EM133005812
Question - Precision Ltd. is a decentralized organization with six autonomous divisions. Dale Delvasi, the manager of the office products division conveyed concerns about a new product line. "I know headquarters wants us to add on that new product line," said Dale, "but I want to see the numbers before I make any move. Our division has led the company for three years, and I don't want any letdown."
The divisions are evaluated on the basis of the return that they are able to generate on invested assets, with year-end bonuses given to the divisional managers who have the highest ROI figures. Operating results for the company's office products division for the most recent year are as follows:
Sales 48,000,000
Less: Variable Expenses 33,600,000
Contribution Margin 14,400,000
Less: fixed Expenses 11,520,000
Net Operating income 2,880,000
Divisional Operating assets 8,000,000
The company had an overall ROI of 8.5% last year (considering all divisions). The office products division has an opportunity to add a new product line that would require an additional investment in operating assets of $4,800,000. The cost and revenue characteristics of the new product line per year would be as follows:
Sales 7,200,000
Variable expenses 70% of sales
Fixed expenses 1,728,000
1. Compute the office products division's ROI for the most recent year; also compute the ROI if the new product line were added.
2. If you were in Dale Delvasi's position, would you be inclined to accept or reject the new product line?
3. Suppose that the company views a return of 8.0% on invested assets as being the minimum that any division should earn and that performance is evaluated by the RI approach.
a. Compute the office products division's RI for the most recent year; also compute the RI as it would appear if the new product line were added.
Under these circumstances, if you were in Dale Delvasi's position, would you accept or reject the new product line?
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