\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2374755 • Letter: #
Question
"I know headquarters wants us to add that new product line," said Dell Havasi, manager of Billings Company's Office Products Division. "But I want to see the numbers before I make any move. Our division's return on investment (ROI) has led the company for three years, and I don't want any letdown."
Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the company's Office Products Division for the most recent year are given below:
12,865,340
5,690,860
$1,723,800
$5,200,000
The company had an overall return on investment (ROI) of 15% last year (considering all divisions). The Office Products Division has an opportunity to add a new product line that would require an additional investment in operating assets of $3,390,000. The cost and revenue characteristics of the new product line per year would be:
Compute the Office Products Division's ROI for the most recent year; also compute the ROI as it would appear if the new product line is added.(Round interim calculations and final answers to 2 decimal places. Omit the "%" sign in your response.)
Compute the Office Products Division's residual income for the most recent year; also compute the residual income as it would appear if the new product line is added. (Omit the "$" sign in your response.)
"I know headquarters wants us to add that new product line," said Dell Havasi, manager of Billings Company's Office Products Division. "But I want to see the numbers before I make any move. Our division's return on investment (ROI) has led the company for three years, and I don't want any letdown."
Explanation / Answer
Total ror company=1803120/8590000)*100=20.99%
new line=793260/3390000)*100=23.4%
Residual income
Present= 5200000*15%=780000
New line=3390000*15%=508500
Total company=8590000*15%=1288500
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