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Refer to Exercise 10.7 for data. At the end of Year 2, the manager of the Houseware Division is concerned about the division’s performance. As a result, he is considering the opportunity to invest in two independent projects. The first is called the Espresso-Pro; it is an in-home espresso maker that can brew regular coffee as well as make espresso and latte drinks. While the market for espresso drinkers is small initially, he believes this market can grow, especially around gift-giving occasions. The second is the Mini-Prep appliance that can be used to do small chopping and dicing chores that do not require a full-sized food processor. Without the investments, the division expects that Year 2 data will remain unchanged. The expected operating incomes and the outlay required for each investment are as follows: Jarriot’s corporate headquarters has made available up to $500,000 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 return, 9 percent. Required: 1. Compute the ROI for each investment. 2. Compute the divisional ROI (rounded to four significant digits) for each of the following four alternatives: a. The Espresso-Pro is added. b. The Mini-Prep is added. c. Both investments are added. d. Neither investment is made; the status quo is maintained. Assuming that divisional managers are evaluated and rewarded on the basis of ROI performance, which alternative do you think the divisional manager will choose?

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 10, Problem 8E
Textbook Problem
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Refer to Exercise 10.7 for data. At the end of Year 2, the manager of the Houseware Division is concerned about the division’s performance. As a result, he is considering the opportunity to invest in two independent projects. The first is called the Espresso-Pro; it is an in-home espresso maker that can brew regular coffee as well as make espresso and latte drinks. While the market for espresso drinkers is small initially, he believes this market can grow, especially around gift-giving occasions. The second is the Mini-Prep appliance that can be used to do small chopping and dicing chores that do not require a full-sized food processor. Without the investments, the division expects that Year 2 data will remain unchanged. The expected operating incomes and the outlay required for each investment are as follows:

Chapter 10, Problem 8E, Refer to Exercise 10.7 for data. At the end of Year 2, the manager of the Houseware Division is

Jarriot’s corporate headquarters has made available up to $500,000 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 return, 9 percent.

Required:

  1. 1. Compute the ROI for each investment.
  2. 2. Compute the divisional ROI (rounded to four significant digits) for each of the following four alternatives:
    1. a. The Espresso-Pro is added.
    2. b. The Mini-Prep is added.
    3. c. Both investments are added.
    4. d. Neither investment is made; the status quo is maintained.

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

1.

To determine

Compute the ROI for each of the investment.

Explanation of Solution

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies.

ROI = OperatingIncomeAverageTotalAssets

Compute the Return on Investment (ROI) for each investment:

For Investment EP:

ROI = OperatingIncomeAverageTotalAssets=$27,500$250,000=0

2.

To determine

Compute the divisional ROI for each of the given alternatives. Identify the alternative that the manager will choose.

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Chapter 10 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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