LaserLife Printer Cartridge Company Is a Decentralized Organization with Several

question 60

Essay

LaserLife Printer Cartridge Company is a decentralized 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 2015 are budgeted as follows:
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 5,000,000 \\\hline \text { Less variable costs } & 2,500,000 \\\hline \text { Contribution margin } & 2,500,000 \\\hline \text { Less fixed expenses } & \underline { 1,800,000 } \\\hline \text { Net operating income } & \$ 700,000 \\\hline\end{array}$$ Operating assets for the division are currently $3,600,000.For 2015,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:

Journal Entry

A record in accounting that notes the details of a financial transaction in a company’s financial systems.

Raw Materials

Basic materials that are used in the production process to manufacture goods, often transformed or converted into the finished product.

Journal Entry

A record in the books of account that represents a transaction and its effect on the accounts, typically including a debit and credit.

Period Costs

Costs not directly linked to manufacturing and are charged as expenses when they occur, including sales, general, and administrative costs.