Question

LaserLife Printer Cartridge Company is a decentralised organization with several autonomous divisions. The division managers are evaluated, in part, on the basis of the change in their return on invested assets. Operating results for the Packer Division for 2018 are budgeted as follows: Sales $5,000,000 Less variable costs 2.500.000 Contribution margin 2,500,000 Less fixed expenses 1,800,000 $700.000 Net operating income Operating assets for the division are currently $3,600,000. For 2018, the division can add a new product line for an investment of $600,000. The new product line will generate sales of $1,600,000 and will incur fixed expenses of $600,000 annually. Variable costs of the new product will average 60% of the selling price. Required: a. What is the effect on ROI of accepting the new product line? (3 Marks) b. 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. (3 Marks) c. List one advantage and one limitation of residual income as performance measures for division managers. (2 Marks)

Answer 1

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