2-28 AM 1 know headquarters wants us to add that new product line, said Dell Hav

Question

2-28 AM 1 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 divisions 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 $21,400,000 Variable expenses 13,515,400 Contribution margin 7,884,600 Fixed expenses Net operating income Divisional operating assets 5,980,000 $ 1,904,600 5,350,000 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: Sales Variable expenses Fixed expenses 9,200,000 65% of sales $ 2,548,400 Required: 1. Compute the Office Products Division's ROl for the most recent year; also compute the ROl as it would appear if the new product line is added. (Round the "Margin", "Turnover" and decimal places.) "ROl" answers to 2

Explanation / Answer

2) The new product line should be accepted.

this is because the opverall ROI of the company is 16% wheras the ROI from the new product line is 23.36%.

3) The comany is anxious for

Adding new product line would decrease the company's overall ROI

4)a)

b)

The new product line should be accepted as it provides a positive residual income. Over and above the minimum required income.

present new line total Operating assets $ 53,50,000.00 $ 28,75,000.00 $ 82,25,000.00 minimum required return 13% 13% 13% Minimum net operating income $    6,95,500.00 $    3,73,750.00 $ 10,69,250.00 Actual net operating income $ 19,04,600.00 $    6,71,600.00 $ 25,76,200.00 minimum net operating income $    6,95,500.00 $    3,73,750.00 $ 10,69,250.00 residual income $ 12,09,100.00 $    2,97,850.00 $ 15,06,950.00

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