The New Products Division of Testar Company, had operating income of $9,000,000 and operating assets of $45,800,000 during the current year. The New Products Division has developed a potential new product that would require $9,500,000 in operating assets and would be expected to provide $2,400,000 in operating income each year. Testar has set a target return on investment (ROI) of 19% for each of its divisions. Assuming that the new product is put into production, calculate the division's ROI.
A) 20.61%
B) 19.65%
C) 25.26%
D) The answer cannot be determined using the information provided.

Question

Quizplus · Accepted Answer

ROI = Operating income/Operating assets
Current ROI = 9,000,000/45,800,000 = 19.65%
New operating income = 9,000,000 + 2,400,000 = 11,400,000
New operating assets = 45,800,000 + 9,500,000 = 55,300,000
New ROI = 11,400,000/55,300,000 = 20.61%
Since the new ROI (20.61%) exceeds the target ROI (19%), the new product should be put into production.

The New Products Division of Testar Company, Had Operating Income