Compute the east division roi for last year


Assignment:

“I know headquarters wants us to add that new product line,” said Pete Johnson, manager of Sunset Products’ East Division. “But I want to see the numbers before I make a move. Our division’s return on investment (ROI0 has led the company for three years, and don’t want any letdown.”

Sunset Products is 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 East Division for 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 East 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

1. Compute the East division ROI for last year; also compute the ROI as it would appear if the new product line is added.

2. Would you accept or reject the new product line and explain

3. Why do you suppose headquarters is anxious for the East Division to add the new product line?

4. Suppose that the company’s minimum requires rate of return on operating assets is 15% and that performance is evaluated using residual income.

a. Compute the East Division residual income for last year , also the residual income as it would appear if the new product line is added

b. Under these circumstances would you accept or reject the new product line-explain.

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Accounting Basics: Compute the east division roi for last year
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