If a return of 6 percent is the minimum that any division

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Reference no: EM13582408

RCI Inc. is a decentralized organization with four autonomous divisions. The divisions are evaluated on the basis of the change in their return on invested assets. Operating results in the Commercial Division for 2012 follow:

RCI INC.-COMMERCIAL DIVISION

Income Statement

For Year Ending December 31, 2012

Sales................................................. $3,125,000

Less variable expenses................ (1,600,000)

Contribution margin................... 1,525,000

Less fixed expenses.................... (1,000,000)

Net operating income.................. $525,000

Operating assets for the Commercial Division currently average $2,500,000. The Commercial Division can add a new product line for an investment of $300,000. Relevant data for the new product line are as follows:

Sales................................................ $800,000

Variable expenses (% of sales)............... 0.60

Fixed expenses.................................. $275,000

Increase in current liabilities.................. $20,000

a. Determine the effect on ROI of accepting the new product line. (Round calculations to three decimal places.)

b. If a return of 6 percent is the minimum that any division should earn and residual income is used to evaluate managers, would this encourage the division to accept the new product line? Explain and show computations.

c. If EVA is used to evaluate managers, should the new product line be accepted if the weighted average cost of capital is 8 percent and the income tax rate is 40 percent?

Reference no: EM13582408

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