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RCI Inc. is a decentralized organization with four autonomous divisions. The divisions are...

Question:

RCI Inc. is a decentralized organization with four autonomous divisions. The divisions are evaluated on the basis of the change in their return on invested assets. Operating results in the Commercial Division for 2012 follows:

RCI INC- Commercial Division Income Statement For Year Ending December 31,2012
Sales $3,125,000
Less variable expenses (1,600,000)
Contribution margin 1,525,000
Less fixed expenses (1,000,000)
Net operating income $525,000

Operating assets for the Commercial Division currently average $2,500,000. The Commercial Division can add a new product line for an investment of $300,000. Relevant data for the new product line are as follows:

Sales $800,000
Less variable (% of sales) 0.60
Fixed expenses $275,000
Increase in current liabilities $20,000

Required: Determine the effect of ROI of accepting the new product line. (Round calculation to three decimal places).

If a return of 6% is the minimum that any division should earn and residual income is used to evaluate managers, would this encourage the division to accept the new product line?

Explain and show computations.

IF EVA is used to evaluate managers, should the new product line be accepted if the weighted average cost of capital is 8% and the income tax rate is 40%?

Return on Investment:

Return on investment is calculated by dividing the dollar return from the investment with the initial cost. It is one of the crucial ratios that investors look for before investing in a company.

Answer and Explanation:

Solution a:

Particulars Commercial Division New Product Commercial Division after new product
Sales 3,125,000 800,000 3,925,000
Less: Variable...

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Return on Investment: Definition, Formula & Example

from Intro to Business: Help and Review

Chapter 25 / Lesson 6
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