“I know headquarters wants us to add that new product line,\" said Dell Havas.,
ID: 2510230 • Letter: #
Question
“I know headquarters wants us to add that new product line," said Dell Havas., 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 ROls. Operating results for the company's Office Products Division for this year are given below: Sales Variable expenses Contribution marain Fixed expenses Net operating income Divisional average operating assets $22,835,000 14,297,200 8,537,800 6,190,000 $ 2,347,800 $4,000,000 The company had an overall return on investment (ROI) of 17.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $2,755,000. The cost and revenue characteristics of the new product line per year would beExplanation / Answer
Net operating income of new product line=9915000*(1-0.65)-2607450= $862800 1 ROI for this year 58.70% =2347800/4000000 ROI for the new product itself 31.32% =862800/2755000 ROI for next year 47.53% =(2347800+862800)/(4000000+2755000) 4 Reject 5 Adding the new product line would increase company's overall ROI 6 Residual income for this year 1787800 =2347800-(4000000*14%) Residual income for new product 477100 =862800-(2755000*14%) Residual income for next year 2264900 =1787800+477100 6d Accept
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