Compute the residual income for investment

Assignment Help Managerial Accounting

Reference no: EM133342130

The manager of a division that produces electronic audio products

The manager of a division that produces electronic audio products is considering the opportunity to invest in two independent projects. The first is a portable MP3 player. The second is a voice recorder designed as a module for visor or palm PDAs. Without the investments, the division will have invested capital for the coming year of $18 million and expected operating profit of $2.7 million. The expected contribution margins, fixed expenses and the invested capital required for each investment are as follows:

	MP3PLAYER	VOICE RECORDER
CONTRIBUTION MARGIN (salesminus variable expense)	$126,000	$120,000
FIXED EXPENSES	$10,000	$15,000
INVESTED CAPITAL	$800,000	$750,000

Corporate headquarters has made available up to $2 million of capital for this division. Any funds not invested by the division will be retained by headquarters and invested to earn the company's minimum required rate of 12%.

REQUIRED (Show all relevant workings; where appropriate)

1. Compute the residual income for each investment.

2. Compute the divisional residual income for each of the following four alternatives:

a. The MP3 player is added

b. The voice recorder is added.

c. Both investments are added.

d. Neither investment is made; the status quo is maintained.

e. Assuming that divisional managers are evaluated and rewarded on the basis of residual income, which alternative do you think the divisional manager will choose?

3. Compute the ROI for each investment (Note: Round-off ROI to 2 decimal places)

4. Compute the divisional ROI for each of the following four alternatives:

a. The MP3 player is added.

b. The voice recorder is added.

c. Both investments are added.

d. Neither investment is made; the status quo is maintained.

(Note: Round-off ROI to 2 decimal places)

e. Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose?

Reference no: EM133342130

Questions Cloud

Develop a budget strategy : As you develop a budget strategy and prepare to create a budget proposal next week, perform an internet search for templates.

Think about nursing situation : Think about a nursing situation that occurred in your practice with you as the nurse. Was there an unexpected outcome that could have been prevented?

Compute the revenue and spending variances : Compute the revenue and spending variances for the pizzeria for November - In November, the pizzeria budgeted for 2,010 pizzas at an average selling price

Person psychology has direct impact : Explain to what extent you believe that a person's psychology has a direct impact on how they live out their faith.

Compute the residual income for investment : divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose

Principles of change theory and motivational interviewing : Compare and contrast principles of Change Theory and Motivational Interviewing and how these principles inform therapeutic interventions.

Model description least restrictive principle : Explain the following models of service delivery. Model Description Least Restrictive Principle (LRP) Person Centred Planning (PCP) Transitional (T).

What are two reasons some industries have inventory : Why would a company care about which inventory valuation method it uses-LIFO, FIFO, or average? Provide an example to support your answer.

What is skypes business strategy : What is Skypes Business Strategy? What is their competitive advantage and how did they develop it? How does Skype identify its market and how do they

User Account

All Pages