MGAB03H3 Study Guide - Final Guide: Earnings Before Interest And Taxes, Contribution Margin, Infor
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%u201CI know headquarters wants us to add thatnew product line,%u201D said Fred Halloway, manager of KirsiProducts%u2019 East Division. %u201CBut I want to see the numbersbefore I make a move. Our division%u2019s return on investment(ROI) has led the company for three years, and I don%u2019t wantany letdown.%u201D
Kirsi Products isa decentralized wholesaler with four autonomous divisions. Thedivisions are evaluated on the basis of ROI, with year-end bonusesgiven to divisional managers who have the highest ROI. Operatingresults for the company%u2019s East Division for last year aregiven below: |
| Sales | $ | 15,300,000 |
| Variable expenses | 13,000,000 | |
| Contribution margin | 2,300,000 | |
| Fixed expenses | 1,106,600 | |
| Netoperating income | $ | 1,193,400 |
| | | |
| Divisional operating assets | $ | 5,100,000 |
| | | |
The company had an overall ROI of 18% last year(considering all divisions). The company%u2019s East Division hasan opportunity to add a new product line that would require aninvestment of $2,560,000. The cost and revenue characteristics ofthe new product line per year would be as follows: |
| Sales | $7,680,000 |
| Variable expenses | 65%of sales |
| Fixedexpenses | $ 2,119,680 |
| Required: | |
| 1. | Compute the East Division%u2019s ROI for lastyear; also compute the ROI as it would appear if the companyperformed the same as last year and added the new product line.(Do not round intermediatepercentage values. Round other intermediate calculations and finalanswers to 2 decimal places.) |
| ROI | |
| Present | % |
| New product line alone | % |
| Total | % |
| 2. | Ifyou were in Fred Halloway%u2019s position, would you accept orreject the new product line? | ||||
|
| 3. | Whydo you suppose headquarters is anxious for the East Division to addthe new product line? | ||||
|
| 4. | Suppose that the company%u2019s minimum required rate of return onoperating assets is 15% and that performance is evaluated usingresidual income. |
| a. | Compute the East Division%u2019s residual income for last year;also compute the residual income as it would appear if the companyperformed the same as last year and added the new productline. |
| Residual income | |
| Present | $ |
| New product line alone | $ |
| Total | $ |
| b. | Under these circumstances, if you were in Fred Halloway's positionwould you accept or reject the new product line? | ||||
|
?I know headquarters wants us to add that new product line,?said Fred Halloway, manager of Kirsi Products? East Division. ?ButI want to see the numbers before I make a move. Our division?sreturn on investment (ROI) has led the company for three years, andI don?t want any letdown.? |
Kirsi Products is a decentralizedwholesaler with four autonomous divisions. The divisions areevaluated on the basis of ROI, with year-end bonuses given todivisional managers who have the highest ROI. Operating results forthe company?s East Division for last year are given below: |
| Sales | $ | 16,200,000 |
| Variableexpenses | 13,000,000 | |
| Contributionmargin | 3,200,000 | |
| Fixed expenses | 1,985,000 | |
| Net operatingincome | $ | 1,215,000 |
| Divisional operatingassets | $ | 5,400,000 |
The company had an overall ROI of 18% last year (considering alldivisions). The company?s East Division has an opportunity to add anew product line that would require an investment of $3,180,000.The cost and revenue characteristics of the new product line peryear would be as follows: |
| Sales | $9,858,000 |
| Variableexpenses | 65% ofsales |
| Fixed expenses | $2,720,808 |
| Required: | |
| 1. | Compute the East Division?s ROI for last year; also compute theROI as it would appear if the company performed the same as lastyear and added the new product line. (Do not roundintermediate percentage values. Round other intermediatecalculations and final answers to 2 decimal places.) |
| ROI | |
| Present | % |
| New product linealone | % |
| Total | % |
| 2. | If you were in Fred Halloway?sposition, would you accept or reject the new product line? | ||||
|
| 3. | Why do you suppose headquartersis anxious for the East Division to add the new product line? | ||||
|
| 4. | Suppose that the company?sminimum required rate of return on operating assets is 15% and thatperformance is evaluated using residual income. |
| a. | Compute the East Division?sresidual income for last year; also compute the residual income asit would appear if the company performed the same as last year andadded the new product line. |
| Residualincome | |
| Present | $ |
| New product linealone | $ |
| Total | $ |
| b. | Under these circumstances, ifyou were in Fred Halloway's position would you accept or reject thenew product line? | ||||
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