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The manager of a division that produces electronic audio products

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The manager of a division that produces electronic audio products...

The manager of a division that produces electronic audio products is considering the opportunity to invest in two independent projects. The first is a portable MP3 player. The second is a voice recorder designed as a module for visor or palm PDAs. Without the investments, the division will have invested capital for the coming year of $18 million and expected operating profit of $2.7 million. The expected contribution margins, fixed expenses and the invested capital required for each investment are as follows:

	MP3PLAYER	VOICE RECORDER
CONTRIBUTION MARGIN (salesminus variable expense)	$126,000	$120,000
FIXED EXPENSES	$10,000	$15,000
INVESTED CAPITAL	$800,000	$750,000

   

Corporate headquarters has made available up to $2 million of capital for this division. Any funds not invested by the division will be retained by headquarters and invested to earn the company's minimum required rate of 12%.

 

 

REQUIRED (Show all relevant workings; where appropriate)

 

1.     Compute the residual income for each investment.             

 

2.     Compute the divisional residual income for each of the following four alternatives:

 

a.    The MP3 player is added

b.    The voice recorder is added.                                         

c.    Both investments are added.                                           

d.    Neither investment is made; the status quo is maintained.

 

e.    Assuming that divisional managers are evaluated and rewarded on the basis of residual income, which alternative do you think the divisional manager will choose?                                                    

 

3. Compute the ROI for each investment (Note: Round-off ROI to 2 decimal places)                                                                                     

 

4. Compute the divisional ROI for each of the following four alternatives:

 

a.    The MP3 player is added.                                                          

b.    The voice recorder is added.                                       

c.    Both investments are added.                                      

d.    Neither investment is made; the status quo is maintained.

(Note: Round-off ROI to 2 decimal places)              

 

e.    Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose?