“I know headquarters wants us to add that new product line,” said Dell Havasi, m
ID: 2535703 • 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 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 $2,387,500. The cost and revenue characteristics of the new product line per year would be:
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
4. Suppose that the company’s minimum required rate of return on operating assets is 12.00% and that performance is evaluated using residual income.
a. 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.
Present New Line Total
operating Assets
Minimum Required Return
Minimum net operating income
Actual net operating income
Minumum net operating income
Residual Income
Sales $ 22,100,000 Variable expenses 13,893,400 Contribution margin 8,206,600 Fixed expenses 6,085,000 Net operating income $ 2,121,600 Divisional operating assets $ 5,200,000Explanation / Answer
Net operating Income new line = 9550000*(1-0.65)-2578500= $764000 1 Margin = Net operating Income/Sales Turnover = Sales/ Operating Assets ROI = Margin*Turnover Present New line Total Sales 22100000 9550000 31650000 Net operating Income 2121600 764000 2885600 Operating Assets 5200000 2387500 7587500 Margin 9.60% 8.00% 9.12% Turnover 4.25 4 4.17 ROI 40.80% 32.00% 38.03% 4 Present New line Total Operating Assets 5200000 2387500 7587500 Minimum Required Return 12% 12% 12% Minimum net operating income 624000 286500 910500 Actual net operating income 2121600 764000 2885600 Minumum net operating income 624000 286500 910500 Residual Income 1497600 477500 1975100
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