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    Assignment-2 Responsibility-Accounting Students

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    Lorraine Miralles
    1. The Laptops Division of Lappy Company had an ROI of 20% last year based on net operating income of $800,000 from assets of $4,000,000. With the new product line requiring $1,000,000 more in assets, the ROI would decrease to 18%. 2. As the new product line increases sales by $2,000,000 with variable costs of 60% and fixed costs of $640,000, it would increase net operating income by $128,000. While this decreases the division's ROI, management would likely accept the line as it increases income. 3. Headquarters wants to add the line because it would increase overall company income and sales despite a

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    Assignment-2 Responsibility-Accounting Students

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    Lorraine Miralles
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    1. The Laptops Division of Lappy Company had an ROI of 20% last year based on net operating income of $800,000 from assets of $4,000,000. With the new product line requiring $1,000,000 more in assets, the ROI would decrease to 18%. 2. As the new product line increases sales by $2,000,000 with variable costs of 60% and fixed costs of $640,000, it would increase net operating income by $128,000. While this decreases the division's ROI, management would likely accept the line as it increases income. 3. Headquarters wants to add the line because it would increase overall company income and sales despite a

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    1. The Laptops Division of Lappy Company had an ROI of 20% last year based on net operating income of $800,000 from assets of $4,000,000. With the new product line requiring $1,000,000 more in assets, the ROI would decrease to 18%. 2. As the new product line increases sales by $2,000,000 with variable costs of 60% and fixed costs of $640,000, it would increase net operating income by $128,000. While this decreases the division's ROI, management would likely accept the line as it increases income. 3. Headquarters wants to add the line because it would increase overall company income and sales despite a

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    © All Rights Reserved
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    6 views1 page

    Assignment-2 Responsibility-Accounting Students

    Uploaded by

    Lorraine Miralles
    1. The Laptops Division of Lappy Company had an ROI of 20% last year based on net operating income of $800,000 from assets of $4,000,000. With the new product line requiring $1,000,000 more in assets, the ROI would decrease to 18%. 2. As the new product line increases sales by $2,000,000 with variable costs of 60% and fixed costs of $640,000, it would increase net operating income by $128,000. While this decreases the division's ROI, management would likely accept the line as it increases income. 3. Headquarters wants to add the line because it would increase overall company income and sales despite a

    Copyright:

    © All Rights Reserved
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    of 1

    PROBLEM #1 Lappy Company is a decentralized wholesaler with five autonomous divisions. b.

    b. Under these circumstances, if you were in the management’s position, would you
    The divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional accept or reject the new product line? Explain.
    managers who have the highest ROIs. Operating results for the company’s Laptops Division
    for the most recent year are given below:
    PROBLEM #2 Roofing, Inc., had after-tax operating income last year of $600,000. Two
    Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000,000
    sources of financing were used by the company: $4.5 million of mortgage bonds paying 9
    Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000,000 percent interest and $12 million in common stock, which was considered to be no more or
    less risky than other stocks. The rate of return on long-term government bonds is 6 percent.
    Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000
    Roofing pays a marginal tax rate of 40 percent. Total capital employed is $5.5 million.
    Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200,000 Required

    Net operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 800,000 1. What is the weighted cost of capital for Roofing?

    Divisional operating assets . . . . . . . . . . . . . . . . . . . . . . $ 4,000,000 2. Calculate EVA for Roofing.

    The company had an overall return on investment (ROI) of 15% last year (considering all
    divisions). The Laptops Division has an opportunity to add a new product line that would
    PROBLEM #3 Tokneneng, division manager of Kwek-kwek, Inc., was debating the merits of
    require an additional investment in operating assets of $1,000,000. The cost and revenue
    a new product—an egg waffle maker. The budgeted income of the division was $240,000
    characteristics of the new product line per year would be:
    with operating assets of $4,000,000. The proposed investment would add income of $135,000
    Sales . . . . . . . . . . . . . . . . . . $2,000,000 and would require an additional investment in equipment of $750,000.

    Variable expenses . . . . . . . . 60% of sales Required:

    Fixed expenses . . . . . . . . . . $640,000 1. Compute the ROI of:

    Required: a. the division if the egg waffle maker is not undertaken

    1. Compute the Laptops Division’s ROI for the most recent year; also compute the ROI as it b. the egg waffle maker
    would appear if the new product line is added.
    c. the division if the egg waffle maker is undertaken
    2. If you were in the management, would you accept or reject the new product line? Explain.
    2. Do you suppose that Tokneneng will decide to invest in the new radio? Why or why not?
    3. Why do you suppose headquarters is anxious for the Laptops Division to add the new
    product line?
    4. Suppose that the company’s minimum required rate of return on operating assets is 12%
    and that performance is evaluated using residual income.
    a. Compute the Laptops Division’s residual income for the most recent year; also
    compute the residual income as it would appear if the new product line is added.

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