Billings Company is a decentralized wholesaler with five autonomous divisions. T
ID: 2498882 • 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 17.00% 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 $2,755,000. 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. (Do not round intermediate calculations. Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) COMPUTE Sales, Net Operating Income, Operating Assets, Margin (as a %), Turnover, and ROI (as a %) for Present, New Line and TOTAL.
Suppose that the company’s minimum required rate of return on operating assets is 14.00% 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. (Enter your Minimum Required Rate as a whole percentage (i.e., 0.12 should be entered as 12).) Compute Operating Assets, Minimum Required Return (as a %) , Actual Net Operating Income and Minimum Net Operating Income for Present, New Line and Total.
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:
Explanation / Answer
Statement showing calculation of margin, turnover and ROI Present New line Total 1. Sales $22,835,000 $9,915,000 $32,750,000 2. Variable expenses $14,297,200 $6,444,750 $20,741,950 3. Contribution [1 - 2] $8,537,800 $3,470,250 $12,008,050 4. Fixed expenses $6,190,000 $2,607,450 $8,797,450 5. Net operating income (NOI) [3-4] $2,347,800 $862,800 $3,210,600 6. Net operating assets $4,000,000 $2,755,000 $6,755,000 7. Margin [ 5/1] x 100 10.28 8.7 9.8 8. Turnover [1/6]*100 5.71 3.6 4.85 9. ROI [5/6]*100 58.7 31.32 47.53
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