Betsy Union is the Pika Division manager and her performance is evaluated by executive management based on Division ROI. The current controllable margin for Pika Division is $46,000. Its current operating assets total $210,000. The division is considering purchasing equipment for $40,000 that will increase sales by an estimated $10,000, with annual depreciation of $10,000. If the equipment is purchased, what will happen to the return on investment for the division?

Betsy Union is the Pika Division manager and her performance is evaluated by executive management based on Division ROI. The current controllable margin for Pika Division is $46,000. Its current operating assets total $210,000. The division is considering purchasing equipment for $40,000 that will increase sales by an estimated $10,000, with annual depreciation of $10,000. If the equipment is purchased, what will happen to the return on investment for the division?

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter10: Evaluating Decentralized Operations

Section: Chapter Questions

Problem 13E: The condensed income statement for the Consumer Products Division of Tri-State Industries Inc. is as...

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The condensed income statement for the Consumer Products Division of Tri-State Industries Inc. is as follows (assuming no support department allocations): The manager of the Consumer Products Division is considering ways to increase the return on investment. a. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment of the Consumer Products Division, assuming that 143,750,000 of assets have been invested in the Consumer Products Division. b. If expenses could be reduced by 3,450,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and return on investment for the Consumer Products Division?
Hoffman Ceramics, a division of Fielding Corporation, has an operating income of $64,000 and total assets of $400,000. The required rate of return for the company is 10%. The company is evaluating whether it should use return on investment (ROI) or residual income (RI) as a measurement of performance for its division managers. The manager of Hoffman Ceramics has the opportunity to undertake a new project that will require an investment of $100,000. This investment would earn $14,000 for the company. Read the requirements. From the standpoint of Fielding Corporation this investment is is more than Fielding's required rate of return. desirable. The ROI of the investment opportunity Requirement 4. What would the residual income (RI) be for Hoffman Ceramics if this investment opportunity were to be undertaken? Would the manager of the Hoffman Ceramics division want to make this investment if she were evaluated based on RI? Why or why not? First determine the formula to calculate the RI.…
Leslie Corporation uses both ROI and residual income (RI) to measure performance. One of the company's divisions currently has $480,000 of capital invested in assets and is expected to earn operating income of $120,000 in the current period. The division is considering an investment in new equipment costing $345,000 that will likely increase its annual operating income by $45,000. The minimum ROI for all divisions within the company is 9%. 1. If the division does not purchase the equipment, its estimated ROI will be %. 2. If the division invests in the equipment, its ROI will likely decrease to %. 3. If the division does not purchase the equipment, its estimated RI will be $ 4. If the division invests in the equipment, its RI will likely increase to $
The New York Division of Ram Co. currently earns an ROI of 18%. The department manager is considering a new project, which requires a $100,000 investment in operating assets and generates a net operating income of $16,000. Assume that the company’s minimum required rate of return is 14%. Which of the following statement is true? a)If the manager is evaluated based on ROI, she will make the new investment because it increases the department’s ROI by 2%. b)If the manager is evaluated based on ROI, she will make the new investment because it generates an ROI that is 2% greater than the company’s minimum required rate of return. c)If the manager is evaluated based on residual income, she will make the new investment because it increases the department’s residual income by $2,000. d)If the manager is evaluated based on residual income, she will not make the new investment because it decreases the department’s residual income by $2,000.
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Management has determined that in order to upgrade the competitor to Megatronics standards, an additional $375,000 of invested capital would be needed. a. Compute the current ROI of the Northeast Division and the division's ROI if the competitor is acquired. b. If divisional management is being evaluated on the basis of ROI, will the Northeast Division likely pursue acquisition of the competitor? c. Compute the ROI of the competitor as it is now and after the intended upgrade. d. If ROI is used as the basis for evaluation, would Megatronics Corporation likely be infavor of the acquisition of the competitor?e. Calculate the Northeast Division's ROI after acquisition of competitor but before upgrad-ing. f. Assume that Megatronics uses residual income to evaluate performance and desires a 12 percent minimum return on invested capital. Compute the current residual income of the Northeast Division and the division's residual income if the competitor is acquired.g. If divisional management…
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The X Division of XYZ Chemical Co. produced the following operating results for the previous year: Sales $10,000,000; Segment income 1,500,000; Assets 6,000,000. The X Division is considering a $1,000,000 investment in a new project. Minimum required return for XYZ Chemical Company is 20%. If the X Division is evaluated using ROI, how much net income should be generated by the new investment for the X Division to consider investing in it?
Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger SO Division. Selected financial data for the past year is shown as follows. Divisional Investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 10 percent cost of capital and uses beginning-of-the-year Investment when computing ROI and residual income. Ignore Income taxes. Allocated corp. overhead Cost of goods sold Divisional investment R&D Sales SG&A AC Division $ 620 3,240 9,400 2,200 8,800 760 SO Division $ 1,600 6,600 78,000 3,400 18,000 1,330 Required: a. Compute divisional Income for the two divisions. b. Calculate the operating margin, which is equivalent to the return on sales, for the two divisions. c. Calculate ROI for the two divisions. d. Compute residual income for the two divisions.
EKPN Company is currently generating an ROI of 10%. The Winnipeg division of EKPN is operating as an investment centre. It is currently generating an ROI of 13% based on $130,000 in operating assets and a controllable margin of $16,900. The manager of the Winnipeg division has an opportunity to invest in an asset that will cost $30,000 and generate a controllable margin of $3,600. Redisual Income
Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger SO Division. Selected financial data for the past year is shown as follows. Divisional investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 9 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. so Division $ 1,500 AC Division $ 630 Allocated corp. overhead Cost of goods sold 3,260 7,600 77,000 Divisional investment 9,600 R&D 4,200 1,875 9,200 Sales 20,600 SG&A 790 1,230 R&D is assumed to have a two-year life in the AC Division and a nine-year life in the SO division. All R&D expenditures are spent at the beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken…
Colonial Pharmaceuticals is a small firm specializing in new products. It is organized into two divisions, which are based on the products they produce. AC Division is smaller and the life of the products it produces tend to be shorter than those produced by the larger SO Division. Selected financial data for the past year is shown as follows. Divisional investment is as of the beginning of the year. Colonial Pharmaceuticals uses a 8 percent cost of capital and uses beginning-of-the-year investment when computing ROI and residual income. Ignore income taxes. AC Division so Division $ 1,050 Allocated corp. overhead Cost of goods sold Divisional investment $ 675 3,350 10,500 5,500 72,500 3,600 19,500 R&D 2,750 Sales 11,000 SG&A 925 780 R&D is assumed to have a two-year life in the AC Division and a nine-year life in the SO division. All R&D expenditures are spent at the beginning of the year. Assume there are no current liabilities and (unrealistically) that no R&D investments had taken…