\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2584493 • 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 highest ROls. Operating results for the company's Office Products Division for the most recent year are given below. given to the divisional managers who h ave the Sales S 10,000,000 Variable expenses 6,000,000 Contribution margin 4,000,000 Fixed expenses Net operating income Divisional operating assets 3,200,000 S 800,000 S 4,000,000 The company had an overall return on investment (ROI) of 15% 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 $1,000,000. The cost and revenue characteristics of the new product line per year would be: Sales Variable expenses Fixed expenses 52,000,000 60% of sales 5640,000 Required: 1. Compute the Office Products Division's ROl for the most recent year, also compute the ROl as it would appear if the new product line is added. (Round the "Turnover", "ROI" answers to 1 decimal place.) New L Sales Net operating income Operating assets Margin Turnover ROIExplanation / Answer
1 Present New line Total 1.Sales 10000000 2000000 12000000 2.Net operating income 800000 160000 960000 (Note:1) 3.Operating assets 4000000 1000000 5000000 4.Margin (2/1) 0.08 0.08 0.08 5.Turnover (1/3) 2.5 2 2.4 6.ROI (4*5) 0.20 0.16 0.19 Notes: 1. Computation of net operating income for new product line : Sales 2000000 Less: Variable expenses @ 60% 1200000 Contribution margin 800000 Less: Fixed expenses 640000 Net operating income 160000 2 Reject the new product line since there is a decrease of ROI from 20% to 19%. 3 Adding the new line would increase the company's oveall ROI. 4 Present New line Total 1.Operating assets 4000000 1000000 5000000 2.Minimum required return 12% 12% 12% 3.Minimum net operating income (1*2) 480000 120000 600000 4.Actual net operating income 800000 160000 960000 5.Residual income (4-3) 320000 40000 360000 5 Accept the new product line since residual income is increased from 320000 to 360000.
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