Question

1. Alpha Division of the Grande Company produces and sells two products. Each product's operating income and average capital resources are shown below: Product A: Operating Income $500,000; Average capital $5,000,000. Product B: Operating Income $350,000; Average capital $4,100,000. Assuming Alpha's manager has an opportunity to undertake an investment that would require a $500,000 investment and yield $40,000 in net operating income for its product B, what would the ROI be for the entire division?

2.

The production budget: ( choose one)

• Cannot be prepared until the cash budget is completed.

• Must be performed right after the direct materials, direct labor, and overhead budgets.

• Is dependent upon the sales forecast for the period.

• Is the starting point in the preparation of the master budget.

Answer 1

1.

Compute the return on investment (ROI) for the entire division, using the equation as shown below:

ROI = (Operating income for product A + Operating income for product B)/ Total investment

         = ($500,000 + $350,000 + $40,000)/ ($5,000,000 + $4,100,000 + $500,000)

         = $890,000/ $9,600,000

         = 9.270833333%

Hence, the ROI will be 9.270833333%