Problem 1
The management of Thors Corporation is considering dropping product F275. Data from the company's accounting system appear below.
Sales $700,000
Variable Expenses $380,000
Fixed Manufacturing Expenses $195,000
Fixed Selling and Administrative Expenses $150,000
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $75,000 of the fixed manufacturing expenses and $25,000 of the fixed selling and administrative expenses are avoidable if product F275 is discontinued.
Required:
i. What is the net operating income earned by product F275 according to the company's accounting system? Show your work!
ii. What would be the effect on the company's overall net operating income of dropping product F275? Should the product be dropped? Show your work!
Problem 2
Weski Corporation had net operating income of $300,000 and average operating assets of $1,200,000. The company requires a return on investment of 18%.
Required:
i. Calculate the company's current return on investment and residual income.
ii. The company is investigating an investment of $500,000 in a project that will generate annual net operating income of $105,000. What is the ROI of the project? What is the residual income of the project? Should the company invest in this project?