Billings Company is a decentralized wholesaler with five autonomous divisions. T

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 ROls. Operating results for the company's Office Products Division for this year are given below. Sales Variable expenses Contribution margin Fixed expenses Net operating income Divisional average operating assets 22,900,000 14,313,400 8,586,600 6,205,000 2,381,600 4,580,000 The company had an overall return on investment (ROI) of 1700% 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 $2.484,500. The cost and revenue characteristics of the new product line per year would be Sales variable expenses Fixed expenses 9,942,400 65% of sales 2,602,240

Explanation / Answer

Calculate residual income :

Residual income = Actual income-Minimum operating income

1 Residual income for this year 2381600-(4580000*13%) 1786200 2 Residual income for the next product line by itself 877600-(2484500*13%) 554615 3 Residual income for next year 3259200-(7064500*13%) 2340815

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