View the step-by-step solution to: “I know headquarters wants us to add that new product line,”

“I know headquarters wants us to add tha...
This question was answered on Jul 28, 2012. View the Answer
“I know headquarters wants us to add that new product line,” said Fred Halloway, manager of Kirsi Products’ East Division. “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.”

Kirsi Products 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 East 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 East Division has an opportunity to add a new product line 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
(for the rest of the problem, please refer to attachment)

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8321007 - Accounting.xls

Kirsi Products
1. Computation of East division's ROI
ROI = Net operating income/Operating assets
=1,680,000/5,250,000
=32%
New product line:
Operating income = Sales - Variable costs - Fixed costs...

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