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MCINTYRE CORPORATION

Consider each part independently.

PART 1

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:

Sales                                           $21,000,000

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:

Sales                                             $9,000,000

Variable expenses                    65% of sales

Fixed expenses                            $2,520,000

REQUIRED:

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.

PART 2

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%

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