Billings Company is a decentralized wholesaler with five autonomous divisions. T
ID: 2453869 • Letter: B
Question
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:
The company had an overall return on investment (ROI) of 16.00% 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 $2,875,000. 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 the "Margin", "Turnover" and "ROI" answers to 2 decimal places.)
If you were in Dell Havasi’s position, would you accept or reject the new product line?
Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?
Suppose that the company’s minimum required rate of return on operating assets is 13.00% and that performance is evaluated using residual income.
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.
Under these circumstances, if you were in Dell Havasi’s position, would you accept or reject the new product line?
Sales $ 21,400,000 Variable expenses 13,515,400 Contribution margin 7,884,600 Fixed expenses 5,980,000 Net operating income $ 1,904,600 Divisional operating assets $ 5,350,000Explanation / Answer
Sales $9,200,000 Variable expenses 65% of sales (9,200,000*65/100) 5,980,000 Contribution margin 3,220,000 Fixed expenses 2,548,400 Net operating income 671,600 Return on Investment(ROI) Margin x Turnover Margin= Net operating income/sales Margin= 671,600/9,200,000 Margin= 0.073 Operating assets= 2,875,000 Turnover= Sales/Average operating assets Average operating assets= 5,350,000+2,870,000/2 Average operating assets= 8,225,000/2 Average operating assets= 4,112,500 Turnover= Sales/Average operating assets Turnover=9,200,000/4,112,500=2.237 ROI= Margin x Turnover ROI= 0.073 x 2.237 0.163
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