Faced with headquarters\' desire to add a new product line, Stefan Grenier, mana
ID: 343737 • Letter: F
Question
Faced with headquarters' desire to add a new product line, Stefan Grenier, manager of Bilti Products' East Division, felt that he had to see the numbers before he made a move. His division's ROI has led the company for three years, and he doesn't want any letdown Bilti Products is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROl, with year-end bonuses given to divisional managers who have the highest ROl Operating results for the company's East Division for last year are given below: Sales $28,000,000 Variable expenses 14,300,000 Contribution margin 13,700,000 Fixed expenses Operating income Divisional operating assets 11,740,000 $ 1,960,000 $ 7,000,000 The company had an overall ROI of 12% last year (considering all divisions). The new product line that headquarters wants Grenier's East Division to add would require an investment of $4,000,000. The cost and revenue characteristics of the new product line per year would be as follows Sales Variable expenses 60% of sales Fixed expenses $ 4,200,000 $12,000,000 Required. 1. Compute the East Division's ROI for last year, also compute the ROl as it would appear if the new product line were added. (Do not round intermediate calculations.) Present New Line Total ROIExplanation / Answer
1. present operating income = 1960000
assets = 7000000
ROI = 1960000/7000000 = 0.28 = 28%
Present ROI = 28%
New line:
net income = sales - variable expenses - fixed expenses = 12000000 - 7200000 - 4200000 = 600000
investment = 4000000
ROI = 600000/4000000 = 0.15 = 15%
total ROI = (1960000+600000)/(7000000 + 4000000) = 2560000/11000000 = 0.2327 = 23.27%
2. reject the offer since it reduces the ROI of the division significantly from 28% to 23.27%.
3. adding the new line would increase the company's overall ROI since the new line gives 15% ROI but company's overall current ROI is 12%.
4. present residual income = 1960000
new line residual income as calculated above:
sales - variable expenses - fixed expenses = 12000000 - 7200000 - 4200000 = 600000
total residual income = 1960000 + 600000 = 2560000
the total residual income is increasing significantly, under these circumstances, we should accept the offer.
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