116) Frenchs Forest Publishing Company has three divisions that operate autonomously. Their
results for 2014 are as follows:
Academic Fiction Non–fiction
Sales $15 000 000 $17 000 000 $20 000 000
Contribution margin 1 440 000 1 700 000 3 500 000
Operating profit 1 500 000 1 200 000 2 120 000
Investment base 7 000 000 5 000 000 14 000 000
The company's desired rate of return is 20%.
Required:
116)
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a. Calculate each division's ROI.
b. Calculate each division's residual income.
c. Rank each division by both ROI and residual income.
d. Which division had the best performance in 2014? Why?
117) LaserLife Printer Cartridge Company is a decentralised organisation 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 2014
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 profit $700 000
Operating assets for the division are currently $3 600 000. For 2014, 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% of the selling price.
117)
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Required:
a. What is the effect on ROI of accepting the new product line?
b. If the company's required rate of return is 6% and residual income is used to evaluate
managers, would this encourage the division to accept the new product line? Explain and
show computations.
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