Murray River Fisheries Company Is a Decentralised Organisation with Several

Essay

Murray River Fisheries Company is a decentralised organisation with several autonomous divisions.The division managers are evaluated,in part,on the basis of the change in their return on invested assets.Operating results for the Greenwall Division for 2019 are budgeted as follows:
$$\begin{array} { | l | r | } \hline \text { Sales } & \$ 10000000 \\\hline \text { Less variable costs } & \underline { 5000000 } \\\hline \text { Contribution margin } & 5000000 \\\hline \text { Less fixed expenses } & \underline { 3600000 } \\\hline \text { Net operating profit } & \$ 1400000 \\\hline\end{array}$$
Operating assets for the division are currently $7 200 000.For 2019,the division can add a new product line for an investment of $1 200 000.The new product line will generate sales of $3 200 000 and will incur fixed expenses of $1 200 000 annually.Variable costs of the new product will average 60% of the selling price.
Required:
a.What is the effect on ROI of accepting the new product line?
b.If the company's required rate of return is 6% and residual income is used to evaluate managers,would this encourage the division to accept the new product line? Explain and show computations.
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