\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2450323 • 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 ROl, with year-end bonuses given to the divisional managers who have the highest ROls. Operating results for the company's Office Products Division for the most recent year are given below: Sales $21,750,000 Variable expenses 13,731,600 Contribution margin 8,018,400 Fixed expenses Net operating income Divisional operating assets 6,025,000 $ 1,993,400 $ 4,338,800 The company had an overall return on investment (ROI) of 18.00% 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 $2,126,350. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $ 9,350,000 65% of sales $2,560,500 Required 1. Compute the Office Products Division's ROI for the most recent year, also compute the ROI as it would appear if the new product line is added. (Round the "Margin", "Turnover" and "ROI" answers to 2 decimal places.) Present New Line Total Sales Net operating income Operating assets Margin Turnover ROIExplanation / Answer
1.
2.THE NEW PRODUCT LINE SHOULD BE REJECTED AS IT REDUCES THE OVERALL MARGIN AND ROI TO 8.7% AND 41.85% RESPECTIVELY.
3.ADDING THE PRODUCT WOULD INCREASE THE COMPANY'S OVERALL ROI.
4(a).
(b)UNDER THESE CIRCUMSTANCES THE NEW PRODUCT LINE SHOULD BE REJECTED
PRESENT($) NEWLINE($) TOTAL($) SALES 2,17,50,000 93,50,000 3,11,00,000 NET OPERATING INCOME 19,93,400 7,12,000 27,05,400 OPERATING ASSETS 43,38,800 21,26,350 64,65,150 MARGIN 9.17% 7.61% 8.7% ROI 45.94% 33.48% 41.85%Related Questions
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