# finance data bank

Question # 00004325 Posted By: spqr Updated on: 12/01/2013 08:34 PM Due on: 12/28/2013
Subject Finance Topic Finance Tutorials:
Question

149.1. Compute the sales volume (in units) necessary for Division A to achieve a 20% ROI in 2013.

2. The division manager receives a bonus of 50% of residual income (RI). What is his anticipated bonus for 2013 for the division manager, assuming she achieves the 20% ROI target specified in part (1)?

The Division A of Standard Products is planning its 2013 operating budget. Average operating assets of \$1,500,000 will be used during in the division during the year and per-unit selling prices are expected to average \$100. Variable costs of the division are budgeted at \$400,000, while fixed costs are set at

\$250,000. The company's required rate of return for purposes of calculating residual income (RI) is 18%.

Required:

150.1. What is the effect on ROI of accepting the new product line?

2. If the company's required rate of return is 6% and residual income is used to evaluate managers, would this encourage the division to accept the new product line? Explain and show computations.

The major operating divisions of Grey Company are organized as investment centers for performance-evaluation purposes. The division managers are evaluated, in part, on the basis of the change in the return on investment (ROI) of their units. Operating results for the Division A for the coming year, 2013, based on its existing assets are budgeted as follows:

Operating assets for the Division A are currently \$3,600,000. For 2013, the division can add a new product line for an investment of \$600,000. The new product line is expected to generate sales of \$1,600,000 and will incur fixed expenses of \$600,000 annually. Variable costs of the new product are expected to average 60% of the selling price.

Required:

151.1. Compute the current ROI for each division.

2. Compute the current residual income (RI) for each division.

3. Rank the divisions according to their current ROIs and residual incomes.

4. Determine the effects after adding the new project to each division's ROI and residual income (RI).

5. Assuming the managers are evaluated on either ROI or residual income (RI), which divisions are pleased with the expansion and which ones are unhappy? Explain briefly.

Meridian Investments has three divisions (A, B, C) organized for performance-evaluation purposes as investment centers. Each division's required rate of return for purposes of calculating residual income (RI) is 15%. Budgeted operating results for 2013 for each of the three divisions are as follows:

The company is planning an expansion, which will require each division to increase its investments by \$25,000,000 and its income by \$4,500,000.

Tutorials for this Question
1. ## Solution: finance data bank

Tutorial # 00004122 Posted By: spqr Posted on: 12/01/2013 09:36 PM
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new product line?2. If the company's required rate of return ...
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