\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2427614 • 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 $ 21,810,000 Sales Variable expenses 13,741,200 Contribution margin Fixed expenses 8,068,800 6,040,000 $ 2,028,800 $ 4,363,000 Net operating income Divisional operating asset 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 New line Total Sales $21,810,000 $9,396,500 $31,206,500 Net Operating Income $2,028,800 $723,900 $2,752,700 Operating Assets $4,363,000 $2,350,000 $6,713,000 Margin = NOI/Sales 9.302% 7.07% 8.8% Turnover = Sales/Operating Assets 4.99 or 5 3.99 or 4 4.65 ROI = Margin x Turnover 46.51% 28.28% 40.92%
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