116) Frenchs Forest Publishing Company has three divisions that operate autonomously. Their

results for 2014 are as follows:

Academic Fiction Nonfiction

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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