\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2580029 • 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 $ 21,810,000 Variable expenses 13,741,200 Contribution margin 8,068,800 Fixed expenses Net operating income Divisional operating assets 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 $ 9,396,500 65% of sales S 2,564,875Explanation / Answer
Margin =Net operating income/Sales Turnover = Sales/Operating assets ROI = Margin*Turnover 1 Present New line Total Sales 21810000 9396500 31206500 Net operating income 2028800 723900 2752700 Operating assets 4363000 2350000 6713000 Margin 9.30% 7.70% 8.82% Turnover 5.00 4.00 4.65 ROI 46.50% 30.80% 41.01% 2 Reject 3 Adding the new line would increase the company's overall ROI 4 Present New line Total Operating assets 4363000 2350000 6713000 Minimum required return 15% 15% 15% Minimum Net operating income 654450 352500 1006950 Actual Net operating income 2028800 723900 2752700 Minimum Net operating income 654450 352500 1006950 Residual income 1374350 371400 1745750 b Accept
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