Reference no: EM132575041

Kristi 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 West 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 West 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

Required:

Question 1: Compute the West Division's ROI for last year; also compute the ROI as it would appear if the company duplicated the same performance as last year and also added the new product line.

Question 2: If you were in Fred Holloway's position, would you accept or reject the new product line? Explain.

Question 3: Why do you suppose headquarters is anxious for the West Division to add the new product line?

Question 4: Suppose that the company's minimum required rate of return on operating assets is 15% and that the performance is evaluated using residual income.

Question 5: Compute the West Division's residual income for the last year; also compute the residual income as it would appear if the company duplicated the same performance as last year and also added the new product line.

Question 6: Under these circumstances, if you were in Fred Holloway's position would you accept or reject the new product line? Explain.