The manager of the Cosmetics Division, has had a return on investment of 14% for his division for the past three years. Sanders has the opportunity to invest in a new line of cosmetics which is expected to have a return on investment of 12%. The company's minimum required rate of return is 8%. If managerial performance is evaluated using return on investment (ROI), he will: Reject the opportunity Accept the Opportunity
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- The New York Division of Ram Co. currently earns an ROI of 18%. The department manager is considering a new project, which requires a $100,000 investment in operating assets and generates a net operating income of $16,000. Assume that the company’s minimum required rate of return is 14%. Which of the following statement is true? a)If the manager is evaluated based on ROI, she will make the new investment because it increases the department’s ROI by 2%. b)If the manager is evaluated based on ROI, she will make the new investment because it generates an ROI that is 2% greater than the company’s minimum required rate of return. c)If the manager is evaluated based on residual income, she will make the new investment because it increases the department’s residual income by $2,000. d)If the manager is evaluated based on residual income, she will not make the new investment because it decreases the department’s residual income by $2,000.As indicated in the chapter, return on investment (ROI) is well entrenched in business practice. However, its use can have negative incentive effects on managerial behavior. For example, assume you are the manager of an investment center and that your annual bonus is a function of achieved ROI for your division. You have the opportunity to invest in a project that would cost $420,000 and that would increase annual operating income of your division by $30,000. (This level of return is considered acceptable from top management’s standpoint.) Currently, your division generates annual operating profits of approximately $705,000, on an asset base (i.e., level of investment) of $4,500,000. Required: 1. What is the current return on investment (ROI) being realized by your division (i.e., before considering the new investment)? 2. What would happen to the near-term ROI of your division after adding the effect of the new investment? 3. As manager of this division, given your incentive…Each of the following scenarios requires the use of accounting information to carry out one or more of the following managerial activities: (1) planning, (2) control and evaluation, (3) continuous improvement, or (4) decision making. a. MANAGER: At the last board meeting, we established an objective of earning an after-tax profit equal to 20 percent of sales. I need to know the revenue that we need to earn in order to meet this objective, given that we have 250,000 to spend on the promotional campaign. Once I have estimated sales in units, we then need to outline a promotional campaign that conforms to our budget and that will take us where we want to be. However, to compute the targeted sales revenue, I need to know the unit sales price, the unit variable cost, and the associated fixed production and support costs. I also need to know the tax rate. b. MANAGER: We have problems with our procurement process. Our accounts payable department is spending 80 percent of its time resolving discrepancies between the purchase order, receiving order, and suppliers invoice. Incorrect part numbers on the purchase orders, incorrect quantities ordered, and wrong parts sent (or the incorrect quantity) are just a few examples of sources of discrepancies. A complete redesign of the process has been suggested, which will allow us to eliminate virtually all of the errors and, at the same time, significantly reduce the number of clerks needed in purchasing, receiving, and accounts payable. This redesign promises to significantly reduce costs, decrease lead time, and increase customer satisfaction. c. MANAGER: This overhead cost report indicates that we have spent significantly more on inspection, purchasing, and production than was budgeted. An investigation has revealed that the source of the problem is faulty components from suppliers. A supplier evaluation has revealed that by selecting five suppliers with the best quality records (out of 15 currently used), the number of defective components will be dramatically reduced, thus producing significant overhead savings by reducing the demand for inspections, reordering, and rework. d. MANAGER: A large local firm has approached me and has offered to sell us one of the components used in our small enginesa component that we are currently producing internally. I need to know costs that we would avoid if this component is purchased so that I can assess the economic merits of this offer. e. MANAGER: Currently, our deluxe lawn mower is losing money. We need to increase profits. I would like to know how much our profits would be if we reduce our variable costs by 50 per mower while maintaining our current sales volume. Also, marketing claims that if we increase advertising expenditures by 1,000,000 and cut prices by 15 percent, we can increase the number of mowers sold by 25 percent. I would like to know which approach offers the most profit, or if a combination of the approaches may be best. f. MANAGER: We are implementing a major quality improvement program. We will be increasing the investment in prevention and detection activities with the expectation of driving down both internal and external failure costs. I expect to see trend reports for all categories of quality costs. I want to see if improving quality really does reduce costs and improve profitability. g. MANAGER: Our engineering design department has proposed a new design for our product. The new design promises to reduce post-purchase costs and, as a consequence, increase market share. I need to know the cost of producing this new design because it uses some new components and requires some different manufacturing processes. I would then like to have a projected income statement based on the new market share and new production costs. The planned selling price will be the same, or maybe even 10 percent lower. Projections based on the two price scenarios would be needed. h. MANAGER: My engineers have said that by redesigning our two main production processes, we can reduce move time by 90 percent and wait time by 85 percent. This would decrease cycle time and virtually eliminate the need to carry finished goods inventories. On-time deliveries would also increase dramatically. This would produce cost savings of nearly 20,000,000 per year. Market share and revenues would also increase. Required: 1. Describe each of the four managerial responsibilities. 2. Identify the managerial activity or activities applicable for each scenario, and indicate the role of accounting information in the activity.
- You recently joined ABC Limited, a small company holding a leading position in an embryonic market. You notice that your boss is very optimistic about the company and argues that ABC Limited's future is ensured. Your boss validates his argument by providing the following reasons. • ABC Limited has sixty percent share of the market due to the lowest cost structure, and • The company has the most reliable and highest-valued products. Required: You are required to write a memo to your boss outlining why the assumptions posed might be incorrect.In attempting to achieve better results in the marketplace, management has been looking at changing the reward system for marketing, distribution and sales personnel. This would result in an increase in variable marketing and administrative costs by $2 per unit, and would reduce fixed marketing and distribution costs by $100,000: Calculate the number of units required to breakeven if management implemented the changes and Would you suggest that management pursue the changes? Explain By reference to the above data:How can a company effectively use CPV (Cost-Volume-Profit) analysis to make strategic decisions about its product pricing and production levels?Frank Corporation evaluates its managers based on return on investment (ROI). Hazel B and Sarah D, managers of the electronics and housewares departments respectively, have recently suffered from declining profits in their departments. Over lunch, they discuss the problem, and how they could improve performance. Most of the discussion centers around ways to increase sales. Near the end of the lunch period, however, Sarah remarks that there are two components to consider, and that they have considered only one. She wonders whether there is some way to reduce investment, and by decreasing the denominator of the ROI fraction, to improve the final result. Back at work, Hazel continues to mull over Sarah's remarks. She decides to pursue the matter further, and before the end of the quarter she has sold quite a bit of older equipment and replaced it with equipment obtained with a short-term lease. Her performance, measured by ROI, is markedly improved, although sales continue to be…
- Flamengo Co is a sporting goods manufacturing. Its basketball division had an ROI of 15% in 2020. Which of the following is not an advantage of ROI? O It discourages excessive investment in operating assets. O It encourages cost efficiency. O It encourages managers of departments with high ROIS to invest in average ROI projects. OIt encourages managers to pay careful attention to the relationships among sales, expenses, and investment.Lucas is the X Division manager and his performance is evaluated by executive management based on Division ROI. The current controllable margin for X Division is P46,000. Its current operating assets total P210,000. The division is considering purchasing equipment for P40,000 that will increase sales by an estimated P10,000, with annual depreciation of P10,000. If the equipment is purchased, what is the new ROI (round-off the final answer to one decimal places)?Blue is the controller at the Acme Shoe Company, a large manufacturing companylocated in Franklin, Pennsylvania. Acme has many divisions, and the performance ofeach division has typically been evaluated using a retum on investment (ROI)formula. The return on investment is caleulated by dividing profit by the book value of total assets.In a meeting yesterday with Bob Burn, the compuny president, Blue warned that thisreturn on investment measure might not be accurately rellecting how well thedivisions are doing. Blue is concerned that by using profits and the book value ofussets, division managers might be engaging in some short-term finagling to show the highest possible return. Bob concurred and asked what other numbers they could use to evaluate division performance.Blue said,T'm not sure, Bob. Net income isn't a good number for evaluationpurposes. Becuse we allocate a lot of overhead costs to the divisions on what somemanagers consider an arbitrary basis, net income won't work as a…
- The new chief executive officer (CEO) of Richard Manufacturing has asked for a variety of information about the operations of the firm from last year. The CEO is given the following information, but with some data missing: (Click the icon to view the variety of operations information.) Read the requirements, Requirement 1. Find (a) total sales revenue, (b) selling price, (c) rate of return on investment, and (d) markup percentage on full cost for this product. (a) The total sales revenue is (Round your answer to the nearest cent.) (b) The selling price per unit is (Round the retum on investment to the nearest whole percent, X%.) (c) The rate of return on investment is (d) Calculate the markup percentage on full cost for this product. (Round your intermediary calculations to the nearest cent and the markup to the nearest hundredth percent XXX%) The markup percentage on full cost for this product is Requirement 2. The new CEO has a plan to reduce fixed costs by $200,000 and variable…"I know headquarters wants us to add that new product line," said Dell Havasi, manager of Billings Company's Office Products Division. "But I want to see the numbers before I make any move. Our division's return on investment (ROI) has led the company for three years, and I don't want any letdown." Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIS. Operating results for the company's Office Products Division for this year are given below: Sales Variable expenses Contribution margin Fixed expenses Net operating income Divisional average operating assets The company had an overall return on investment (ROI) of 19.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by…Betsy Union is the Crane Company manager and her performance is evaluated by executive management based on Division ROI. The current controllable margin for Crane Company is $58000. Its current operating assets total $220000. The division is considering purchasing equipment for $40000 that will increase contribution margin by an estimated $13000, with annual depreciation of $13000. If the equipment is purchased, how will the return on investment for the division change? O It will remain unchanged O A decrease of 0.9% O An increase of 0.9% O A decrease of 4.1%