l know headquarters wants us to add that new product line, said Dell Havasi, man

Question

l 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 l 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 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 $10,000,000 Variable expenses 6,000,000 Contribution margin 4,000,000 Fixed expenses Net operating income Divisional operating assets 3,200,000 $800,000 $ 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 $2,000,000 60% of sales $640,000

Explanation / Answer

Present New line Total Sales 10000000 2000000 12000000 net operating income 800000 160000 960000 Operating assets 4000000 1000000 5000000 Margin 8% 8% 8% Turnover 2.5 2 2.4 ROI 20.0% 16.0% 19.2% 4 Present New line Total Operating assets 4000000 1000000 5000000 Minimum required return 12% 12% 12% Minimum net operating income 480000 120000 600000 Actual net operating income 800000 160000 960000 Minimum net operating income 480000 120000 600000 Residual income 320000 40000 360000

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