“I know headquarters wants us to add that new product line,” said Dell Havasi, m
ID: 2406496 • 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 ROIs. Operating results for the company’s Office Products Division for the most recent year are given below:
The company had an overall return on investment (ROI) of 19.00% 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 $2,600,000. The cost and revenue characteristics of the new product line per year would be:
Compute the Office Products Division’s ROI for the most recent year; also compute the ROI as it would appear if the new product line is added. (Do not round intermediate calculations. Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)
If you were in Dell Havasi’s position, would you accept or reject the new product line?
Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?
Suppose that the company’s minimum required rate of return on operating assets is 16.00% and that performance is evaluated using residual income.
Compute the Office Products Division’s residual income for the most recent year; also compute the residual income as it would appear if the new product line is added. (Enter your Minimum Required Rate as a whole percentage (i.e., 0.12 should be entered as 12).)
I am taking this as ann online class and I have a test coming up, this is a practice question but I have no idea where to start. Thank you so much for the help!
“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.”
Explanation / Answer
income on new line contribution (9,100,000*35%)= 3,185,000 less Fixed expense -2,538,900 Net operating income 646100 1,2&3) present new line total Sales 21,200,000 9,100,000 30,300,000 Net operating income 1,844,400 646,100 2,490,500 operating assets 4,240,000 2,600,000 6,840,000 margin 8.70% 7.10% 8.22% turnover 5.00 3.50 4.43 ROI 43.50% 24.85% 36.41% where margin = net operating income/sales turnover = sale/average operating assets ROI = margin *turnover 4) Reject 5) Addint the new product line would improve overall ROI 6) Residual income = net operating income -(average assets *min rate or return) present new line total operating assets 4,240,000 2,600,000 6,840,000 minimum required return 16% 16% 16% min net opeerating income 678400 416000 1094400 actual net operating income 1,844,400 646,100 2,490,500 min net operating income 678400 416000 1094400 residual income 1,166,000 230,100 1,396,100 b) Accept
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