ACCTG202_Chapter 12 Solutions(2)

# ACCTG202_Chapter 12 Solutions(2) - Chapter 12 Solutions...

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Chapter 12 Solutions Problem 12-17  (30 minutes) 1. Present New Line Total (1) Sales. ........................ \$10,000,000 \$2,000,000 \$12,000,000 (2) Net operating income \$800,000 \$160,000 * \$960,000 (3) Operating assets. ...... \$4,000,000 \$1,000,000 \$5,000,000 (4) Margin (2) ÷ (1). ........ 8%    8%     8%     (5) Turnover (1) ÷ (3). ..... 2.5       2.0        2.4        (6) ROI (4) × (5). ............. 20.0%    16.0%     19.2%     * Sales. ............................................................. \$2,000,000 Variable expenses (60% × \$2,000,000). ........   1,200,000     Contribution margin. ...................................... 800,000 Fixed expenses. .............................................       640,000     Net operating income. .................................... \$        160,000     2. Dell Havasi will be inclined to reject the new product line because  accepting it would reduce his division’s overall rate of return. 3. The new product line promises an ROI of 16%, whereas the  company’s overall ROI last year was only 15%. Thus, adding the  new line would increase the company’s overall ROI. 4. a. Present New Line Total Operating assets. .................... \$4,000,000 \$1,000,000 \$5,000,000 Minimum return required. ........  × 12%  × 12%  × 12% Minimum net operating  income. ................................. \$        480,000     \$        120,000     \$        600,000     Actual net operating income. ... \$  800,000 \$  160,000 \$  960,000 Minimum net operating  income (above). ....................       480,000             120,000           600,000     Residual income. ..................... \$        320,000     \$         40,000     \$        360,000     b. Under the residual income approach, Dell Havasi would be  inclined to accept the new product line because adding the  product line would increase the total amount of his division’s  residual income, as shown above.

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Problem 12-18  (30 minutes) 1. Breaking the ROI computation into two separate elements helps  the manager to see important relationships that might remain  hidden. First, the importance of turnover of assets as a key  element to overall profitability is emphasized. Prior to use of the  ROI formula, managers tended to allow operating assets to swell  to excessive levels. Second, the importance of sales volume in  profit computations is stressed and explicitly recognized. Third,  breaking the ROI computation into margin and turnover elements  stresses the possibility of trading one off for the other in attempts  to improve the overall profit picture. That is, a company may shave  its margins slightly hoping for a large enough increase in turnover
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ACCTG202_Chapter 12 Solutions(2) - Chapter 12 Solutions...

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