The New Products Division of Testar Company had operating income of $8,000,000 and operating assets of $44,800,000 during the current year.The New Products Division has developed a potential new product that would require $8,500,000 in operating assets and would be expected to provide $1,400,000 in operating income each year.Testar has set a target return on investment (ROI)of 16% for each of its divisions.Assuming that the new product is put into production,calculate the division's ROI.
A) 17.60%
B) 17.90%
C) 16.50%
D) The answer cannot be determined using the information provided.

Question

Quizplus · Accepted Answer

The division's ROI after the new product is added would be calculated as follows: Total operating income after adding the new product = $8,000,000 (current operating income) + $1,400,000 (new product operating income) = $9,400,000. Total operating assets after adding the new product = $44,800,000 (current operating assets) + $8,500,000 (new product operating assets) = $53,300,000. Therefore, the new ROI = ($9,400,000 / $53,300,000) * 100 = 17.64%, which rounds to 17.60%.

The New Products Division of Testar Company Had Operating Income