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StormLrd StormLrd
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4 years ago
LaserLife Printer Cartridge Company is a decentralized organization with several autonomous divisions. The division managers are evaluated, in part, on the basis of the change in their return on invested assets. Operating results for the Packer Division for the upcoming year are budgeted as follows:

Sales   $5,000,000
Less variable costs   2,500,000
Contribution margin   $2,500,000
Less fixed expenses   1,800,000
Net operating income   $700,000

Total assets for the division are currently $3,600,000. For next year the division can add a new product line for an investment of $600,000. The new product line will generate sales of $1,600,000 and will incur fixed expenses of $600,000 annually. Variable costs of the new product will average 60 percent of selling price.

Required:
a.   What will be the company's ROI after accepting the new product line?
b.   If the company's required rate of return is 6 percent, and residual income is used to evaluate managers, would this encourage the division to accept the new product line? Explain and show computations.
Textbook 

Cost Accounting: A Managerial Emphasis, Canadian Edition


Edition: 7th
Authors:
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MunihasenMunihasen
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4 years ago
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More questions for this book are available here
a.
New investment:
Sales      $1,600,000
Variable costs    $960,000
Fixed costs     600,000   1,560,000
Operating income         $40,000

Current ROI = $700,000/$3,600,000 = 0.194

New investment ROI = $40,000/$600,000 = 0.067

Combined ROI = $740,000/$4,200,000 = 0.176

Accepting the new product line will reduce the division's ROI. This
would make the manager reluctant to make the investment.

b.
Investment    $600,000
Minimum return   ×   0.06
Required amount   $36,000

Income   $40,000
Required amount   36,000
Residual income   $4,000

Manager would accept investment because income is increased by $4,000.
This verified answer contains over 120 words.
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