Financial and Managerial Accounting: P22-34 Leslie Blandings, division manager of Audiotech Inc

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Cornerstones of Financial and Managerial Accounting

P22-34 Return on Investment and Investment Decisions
Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product—a weather radio that would put out a warning if the county in which the listener lived were under a severe thunderstorm or tornado alert.
The budgeted income of the division was $725,000 with operating assets of $3,625,000. The proposed investment would add income of $640,000 and would require an additional investment in equipment of $4,000,000. The minimum required return on investment for the company is 12%.

Required:
1. Compute the ROI of the following (round all answers to whole numbers):
a) division if the radio project is not undertaken
b) radio project alone
c) division if the radio project is undertaken
2. Compute the residual income of the:
a) division if the radio project is not undertaken
b) radio project alone
c) division if the radio project is undertaken
3. Conceptual Connection: Do you suppose that Leslie will decide to invest in the new radio? Why or Why not?
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