# ACCT 226 Misc. Problems Assignment done in june 2015

| October 3, 2018

Problem 11-14 Return on Investment (ROI) and Residual Income [LO1, LO2]“I know headquarters wants us to add that new product line,” said Fred Halloway, manager of Kirsi Products’ East Division. “But I want to see the numbers before I make a move. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.”Kirsi Products is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the highest ROI. Operating results for the company’s East Division for last year are given below:Sales\$27,000,000Variable expenses14,000,000Contribution margin13,000,000Fixed expenses10,759,000Net operating income\$2,241,000Divisional operating assets\$5,400,000The company had an overall ROI of 18% last year (considering all divisions). The company’s East Division has an opportunity to add a new product line that would require an investment of \$3,200,000. The cost and revenue characteristics of the new product line per year would be as follows:Sales\$ 9,920,000Variable expenses65% of salesFixed expenses\$ 2,777,600Required:1.Compute the East Division’s ROI for last year; also compute the ROI as it would appear if the new product line is added. (Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)ROIPresent%New product line alone%Total%2. Suppose that the company’s minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income.a.Compute the East Division’s residual income for last year; also compute the residual income as it would appear if the new product line is added. (Omit the “\$” sign in your response.)Residual incomePresent\$New product line alone\$Total\$Exercise 12-12 Make or Buy a Component [LO3]Royal Company manufactures 27,000 units of part R-3 each year for use on its production line. At this level of activity, the cost per unit for part R-3 is:Direct materials\$4.10Direct labor7.00Variable manufacturing overhead3.90Fixed manufacturing overhead12.00Total cost per part\$27.00An outside supplier has offered to sell 27,000 units of part R-3 each year to Royal Company for \$48.00 per part. If Royal Company accepts this offer, the facilities now being used to manufacture part R-3 could be rented to another company at an annual rental of \$788,000. However, Royal Company has determined that \$8 of the fixed manufacturing overhead being applied to part R-3 would continue even if part R-3 were purchased from the outside supplier.Required:a.What is the total relevant cost of making the product? (Omit the “\$” sign in your response.)Total relevant cost of making the product (27,000 units)\$ b.What is the total relevant cost of buying the product? (Omit the “\$” sign in your response.)Total relevant cost of buying the product (27,000 units)\$ c.What is the opportunity cost of making instead of buying? (Omit the “\$” sign in your response.)Total opportunity cost\$ d.How much profits will increase or decrease if the outside supplier’s offer is accepted? (Input the amount as a positive value. Omit the “\$” sign in your response.)Profits would increase by\$ Exercise 12-14 Special Order [LO4]Glade Company produces a single product. The costs of producing and selling a single unit of this product at the company’s current activity level of 7,300 units per month are:Direct materials\$1.70Direct labor\$2.00Variable manufacturing overhead\$.60Fixed manufacturing overhead\$3.25Variable selling and administrative expenses\$1.00Fixed selling and administrative expenses\$1.00The normal selling price is \$25 per unit. The company’s capacity is 9,500 units per month. An order has been received from a potential customer overseas for 2,200 units at a price of \$22.00 per unit. This order would not affect regular sales.Required:1.If the order is accepted, by how much will monthly profits increase or decrease? (The order would not change the company’s total fixed costs.) (Input the amount as a positive value. Omit the “\$” sign in your response.)Monthly profits would by\$ 2.Assume the company has 500 units of this product left over from last year that are inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? (Round your answer to 2 decimal places. Omit the “\$” sign in your response.)Relevant cost per unit\$

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