“I know headquarters wants us to add that new product line,” said Dell Havasi, m
ID: 2579949 • 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 $2,501,500. The cost and revenue characteristics of the new product line per year would be:
Sales$ 9,500,000 Variable expenses65% of sales Fixed expenses$ 2,574,100
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. (Do not round intermediate calculations. Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)
Present New Line total
Sales
Net operating income
operating assets
margin % % %
turnover
roi % % %
2.
Suppose that the company’s minimum required rate of return on operating assets is 14.00% and that performance is evaluated using residual income.
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
minimium required return % % %
minimium net operating income
actual net operating income
minimium net operaing income
residual income $ $ $
“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.”
Explanation / Answer
Margin =Net operating income/Sales Turnover = Sales/Operating assets ROI = Margin*Turnover 1 Present New line Total Sales 22045000 9500000 31545000 Net operating income 2093000 822650 2915650 Operating assets 5500000 2501500 8001500 Margin 9.49% 8.66% 9.24% Turnover 4.01 3.80 3.94 ROI 38.05% 32.89% 36.44% 4 Present New line Total Operating assets 5500000 2501500 8001500 Minimum required return 14% 14% 14% Minimum Net operating income 770000 350210 1120210 Actual Net operating income 2093000 822650 2915650 Minimum Net operating income 770000 350210 1120210 Residual income 1323000 472440 1795440
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