\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2568167 • 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 (ROl) 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 ROl, 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 $ 22,300,000 13,999,600 Contribution margin Fixed expenses 8,300,400 6,115,000 $ 2,185,400 $ 5,575,000 Net operating income Divisional operating assets 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 $3,857,400. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $9,650,000 65% of sales $2,583,600Explanation / Answer
Net Operating income of New product Line: Sales 9,650,000 Less: variable cost@65% 6,272,500 Contribution 3,377,500 Less: Fixed cost 2,583,600 Net Operating income 793,900 PRESENT NEW LINE TOTAL Sales Revenue 22,300,000 9,650,000 31,950,000 Net operating income 2,185,400 793,900 2,979,300 Operating Assets 5,575,000 3,857,400 9,432,400 Margin%(Net Operating Income/Sales*100) 9.80% 8.23% 9.32% Turnover(Sales/ Operating assets) 4 2.5 3.39 ROI(margin%*Turnover) 39.20% 20.58% 31.59% Req 2: the company should reject the new product Line,as it will lead to drop in overall ROI from 39.20% to 31.59% Req 3: Headquarter is anxous for new product line because Adding the new product line would increase the Company'soverall ROI (as compared to last year ) Req 4A: PRESENT NEW LINE TOTAL Operating Assets 5,575,000 3,857,400 9,432,400 Minimum Required rate of return 17% 17% 17% Minimum Net Operating Income 947750 655758 1603508 Actual Net Operating Income 2,185,400 793,900 2,979,300 Minimum Net operating Income 947,750 655,758 1,603,508 Residual Income 1,237,650 138,142 1,375,792 Req 4B: Under consideration of residual income, the company must accpet the new product line.
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