\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2529228 • 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 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 the most recent year are given below: Sales Variable expenses Contribution margin Fixed expenses Net operating income Divisional operating assets 21,810,000 13,741,200 8,068,800 6,040,000 2,028,800 $ 4,363,000 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 $2,350,000. The cost and revenue characteristics of the new product line per year would be: Sales Variable expenses Fixed expenses S 9,396,500 65% of sales $2,564,875 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 ROI imes times timesExplanation / Answer
1 Present New Line Total Sales 2,18,10,000 93,96,500 3,12,06,500 Less Variable Expenses 1,37,41,200 61,07,725 1,98,48,925 Fixed Expenses 60,40,000 25,64,875 86,04,875 Net Operating Income 20,28,800 7,23,900 27,52,700 Operating Assets 43,63,000 23,50,000 67,13,000 Margin (NOI/Sales) 9.30% 7.70% 8.82% Turnover (Sales/Operating Assets) 5 4 5 ROI (NOI/Operating Assets) 46.50% 30.80% 41.01% 2 Reject As after adding new product line office product division's overall ROI will decrease 3 Adding the new line would increase the company's overall ROI As new product line's ROI is more than company's ROI. 4 a. Present New Line Total Operating Assets 43,63,000 23,50,000 67,13,000 Minimum Required Return 15% 15% 15% Minimum Net Operating Income 6,54,450 3,52,500 10,06,950 Actual Net Operating Income 20,28,800 7,23,900 27,52,700 Less Minimum Net Operating Income 6,54,450 3,52,500 10,06,950 Residual Income 13,74,350 3,71,400 17,45,750 b. Accept As residual income increases after new product line is added
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