Question

1 Adams Corporation evaluates divisional managers based on ROI. Operating results for the 2 company's Northern Division for last year are given below: Sales Variable expenses Contribution margin Fixed expenses Net operating income 27,000,000 16,200,000 10,800,000 8,805,000 1,995.000 $ Average divisional operating assets $ 9,500,000 12 The Northern Division has an opportunity to add a new product line at the beginning of the year as follows: Average required investment Net operating income AGA 2,500,000 400,000 17 Adams Corporation's minimum acceptable rate of return 19 Assuming the company accepts all projects that meet or exceed the minimum rate of return, compute the following: 20 21 Northern Division ROI for last year 23 Northern Division ROI if new product line is added Sheets Sheet1

Answer 1

Return on investment = Net operating profit /Avg operating assets*100

          Northern division ROI for last year =1995000/9500000*100

                              = 21%

         Northern Division ROI if new product is added -

               Net operating profit =1995000+400000 = 2395000 (Last year profit +new product line profit)

               Avg operating assets = 9500000+2500000=12000000 (Existing assets + new investment)

              ROI = 2395000/12000000*100

                   = 19.96%

New product line addition is acceptable and to be implemented since ROI is more than 15%