The Consumer Services Division Is One Part of Vargas Corporation

question 128

Essay

The Consumer Services Division is one part of Vargas Corporation.The Consumer Services Division reported income of $112,000 on an investment in operating assets of $800,000 for Year 1.The division expects this level of performance to continue for Year 2.Senior management of Vargas Corporation has asked the Consumer Services Division to consider adding a new service line that would result in the following revenues and costs:
$$\begin{array} { l r } \text { Reveriues } & \$ 240,000 \\\text { Variable expenses } & 110,000 \\\text { Direct fixed expenses } & 70,000 \\\text { Average operating assets } & 500,000\end{array}$$ Required:
1)Compute the ROI that would be generated by the new product line.
2)Compute the ROI for the Consumer Services Division without the new product line.
3)Compute the Consumer Services Division's residual income without the new product line and with the new product line.The target ROI is 11%.
4)Would the new product line benefit the company as a whole? ROI for the company as a whole is 10%.Will the Consumer Services Division likely add the new product line given the company's use of ROI as a performance measure? Why or why not? Which performance evaluation measure will more likely motivate the division manager to do what is best for the company as a whole?

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Definitions:

Merchandising Firm

A business entity that purchases finished goods and sells them to consumers with or without additional processing or packaging.

Merchandise Inventory

Goods or products that a company holds with the intention of selling them to customers.

Selling Expenses

Costs that are directly tied to the selling of goods and services, such as advertising, sales staff salaries, and commissions.

Budgeted Receipts

Estimated amounts of money expected to be received during a specified budget period.