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ROAM analysis: Rite-Way Corporation

The Rite-Way Corporation, a manufacturer of a line of writing instruments, has completed a ROAM analysis for all products. The deluxe model in its line of fountain pens sells for $5.50 but produces a ROAM of 8.3 percent, well below the 23.5 percent average for the other products. Management believes rising raw material costs, such as gold and silver prices, are beyond Rite-Way's control. Should Rite-Way drop its deluxe product? Should Rite-Way eliminate commissions paid to sales representatives for deluxe sales?

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Should Rite-Way drop its deluxe product?

It depends. The deluxe product is contributing to the firm-wide profits. If you discontinue the product, you will lose 8.3% of managed assets. As long as 8.3% exceeds cost of capital, you are better off continuing the product unless you have alternative uses for the capital that exceed 8.3% return on assets managed (ROAM). Also, if you discontinue the product, will the assets associated with the product be sold ...

Solution Summary

Your tutorial is 260 words and a reference and argues that the product should not be dropped and commissions should not be cut.