LaserLife Printer Cartridge Company Is a Decentralised Organisation with Several

question 30

Essay

LaserLife Printer Cartridge Company is a decentralised organisation 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 2019 are budgeted as follows:
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 5000000 \\\hline \text { Less variable costs } & \underline { 2500000 } \\\hline \text { Contribution margin } & 250000 \\\hline \text { Less fixed expenses } & \underline { 1800000 } \\\hline \text { Net operating profit } & \$ 100000 \\\hline\end{array}$$
Operating assets for the division are currently $3 600 000.For 2019,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?
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.
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Definitions:

Average Total Cost

The aggregate expense of manufacturing (sum of constant and fluctuating costs) spread over the entire volume of goods produced.

Marginal Revenue

represents the extra revenue that an undertaking receives from selling one additional unit of a product or service.

Monopolistically Competitive

Describes a market structure where many companies sell products that are similar but not identical.

Profit-Maximizing

A strategy or approach focused on adjusting production and operational variables to achieve the highest possible profit margins.