Consider each part independently.
The manager of the Alpha Division of the MCINTYRE Corporation said “I want us to add that new product line of chairs, but I want to see the numbers before I make a move. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.”
MCINTYRE Corporation is a 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 Alpha Division for last year are given below:
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 Alpha Division has an opportunity to add a product line of chairs 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:
Variable expenses 65% of sales
Fixed expenses $2,520,000
Compute the Alpha Divison’s ROI for last year; also compute the ROI, as it would appear if the new product line is added.
If you were the manager of the Alpha Division, would you accept or reject the new product line? Explain.
Suppose that the company’s minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income.
Compute the Alpha Division’s residual income for last year; also compute the residual income as it would appear if the new product line is added.
Under these circumstances, if you were in the Alpha Division manager’s position, would you accept or reject the new product line? Explain.
Provide the missing data in the following table:
Alpha Beta Gamma
Sales $800,000 $ ? $ ?
Net operating income $72,000 $ ? $40,000
Average operating assets $ ? $130,000 $ ?
Margin ? 4% 8%
Turnover ? 5 ?
ROI 18% ? 20%