Delta Division Had the Following Results for the Year Just

Essay

Delta Division had the following results for the year just ended:
Sales $375,000
Variable costs 225,000
Fixed costs 120,000
Total operational assets 150,000
Delta is considering a new product line that would involve the following:
Sales $75,000
Variable costs 45,000
Fixed costs 23,250
Total operational assets 37,500
Delta's parent company, Omega, Inc., has a company-wide ROI of 14% and pays bonuses based on divisional ROI.
a)Determine the effect on Delta's ROI if it introduces the new product line. Would Delta's managers be encouraged to introduce the new product line?
b)Determine the effect on Omega's ROI if Delta introduces the new product line. Would the top managers of Omega want to introduce the new product line?
c)Assume a required rate of return of 10% on operational assets invested in each division. Determine the effect on Delta's residual income if it introduces the new product. Would Delta's managers be encouraged to introduce the new product line?