\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2405648 • 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 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 this year are given below: Sales Variable expenses Contribution margin Fixed expenses Net operating income Divisional average operating assets $ 22,045,000 13.882.000 8,163,000 6,070,000 $ 2,093,000 5,500,000 The company had an overall return on investment (ROI) of 16.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $2,501,500. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $9,500,000 65% of sales $2,574,100 Required: 1. Compute the Office Products Division's ROI for this year 2. Compute the Office Products Division's ROI for the new product line by itself 3. Compute the Office Products Division's ROI for next year assuming that it performs the same as this year and adds the new product line 4. If vou were in Dell Havasi's position, would vou accept or reiect the new product line?Explanation / Answer
Net operating income new product line = 9500000*(1-0.65)-2574100= $750900 1 ROI for this year 38.05% =2093000/5500000 ROI for the new product line 30.02% =750900/2501500 ROI for next year 35.54% =(2093000+750900)/(5500000+2501500) 4 Accept 5 Adding the new product line would increase the company's overall ROI 6 Residual income for this year 1378000 =2093000-(5500000*13%) Residual income for new product line 425705 =750900-(2501500*13%) Residual income for this year 1803705 Accept
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