The Managers of Herwhno Want to Introduce a New Product

question 27

Multiple Choice

The managers of Herwhno want to introduce a new product line. The financial performance of the company for the most recent year is given below: $$\begin{array} { | l | l | } \hline \text { Sales } & £ 63,300,000 \\\hline \text { Less variable costs } & £ 36,720,000 \\\hline \text { Contribution } & £ 26,580,000 \\\hline \text { Less fued expenses } & £ 22,720,000 \\\hline \text { Net profit } & £ 3,860,000 \\\hline \text { Divisional capital employed } & \$ 23,200,000 \\\hline\end{array}$$
The company estimates that the required return on investment should be a minimum of 12%.
Details of new product line
The sales manager estimates that sales for the new product will be 420,000 units per annum if the selling price is £5.20 per unit. Variable costs are estimated to be £2.86 per unit. Fixed costs will increase by £900,000.
A budget of £2,000,000 has been agreed for investment in new machinery.
- Calculate the Residual Income for the new investment of £2,000,000

• A)£1,000,000.
• B)-£1,000,000
• C)-£157,200.
• D)-£182,000.

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