Division A of Muscat Company had the following results for the year just ended: Sales $480,000 Variable costs $300,000 Fixed costs $150,000 Total operational assets $200,000 Division A is considering a new product line that would involve the following: Sales $72,000 Variable costs $40,000 Fixed costs $25,000 Total operational assets $60,000 Muscat Company has a company-wide ROI of 10% and pays bonuses based on divisional ROI. Required: a. Determine the effect on Division A’s ROI if it introduces the new product line. b. Would Division A’s managers be encouraged to introduce the new product line? c. Would the top managers of Muscat Company want to introduce the new product line? Explain
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Division A of Muscat Company had the following results for the year just ended:
Sales $480,000
Variable costs $300,000
Fixed costs $150,000
Total operational assets $200,000
Division A is considering a new product line that would involve the following:
Sales $72,000
Variable costs $40,000
Fixed costs $25,000
Total operational assets $60,000
Muscat Company has a company-wide ROI of 10% and pays bonuses based on divisional ROI.
Required:
a. Determine the effect on Division A’s ROI if it introduces the new product line.
b. Would Division A’s managers be encouraged to introduce the new product line?
c. Would the top managers of Muscat Company want to introduce the new product line? Explain
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