\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2424031 • 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 the most recent year are given below Sales $ 21,810,000 Variable expenses 13,741,200 Contribution margin 8,068,800 Fixed expenses Net operating income Divisional operating assets 6,040,000 $ 2,028,800 $ 4,363,000 The company had an overall return on investment (ROI) of 18.00% 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 $2,350,000. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $9,396,500 65% of sales $2,564,875Explanation / Answer
present newline total Sales 21,810,000 9,396,500 31,206,500 variable exp 13,741,200 6,107,725 19,848,925 contribution margin 8,068,800 3,288,775 11,357,575 Fixed expenses 6,040,000 2,564,875 8,604,875 Net operating income 2,028,800 723,900 2,752,700 operating assets 4,363,000 2,350,000 6,713,000 margin 9% 8% 9% Turnover 21,810,000 9,396,500 31,206,500 ROI 47% 31% 41% Accept as the ROI is greater than the company's overall ROI of 18% Adding the new line would increase the company's overall ROI.
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