\"I know headquarters wants us to add that new product line, said Dell Havasi, m
ID: 2430304 • 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 $ 22,700,000 Variable expenses 14,363,700 Contribution margin 8,336,300 Fixed expenses Net operating income Divisional operating assets 6,175,000 $ 2,161,300 $ 5,675,000 The company had an overall return on investment (ROI) of 16.00% 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 $3,938,000. The cost and revenue characteristics of the new product line per year would be:Explanation / Answer
income on new line contribution (9,800,000*35%)= 3,430,000 less Fixed expense -2,582,900 Net operating income 847100 1,2&3) present new line total Sales 22,700,000 9,800,000 32,500,000 Net operating income 2,161,300 847,100 3,008,400 operating assets 5,675,000 3,938,000 9,613,000 margin 9.52% 8.64% 9.26% turnover 4.00 2.49 3.38 ROI 38.08% 21.51% 31.30% 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 5,675,000 3,938,000 9,613,000 minimum required return 13% 13% 13% min net opeerating income 737750 511940 1249690 actual net operating income 2,161,300 847,100 3,008,400 min net operating income 737750 511940 1249690 residual income 1,423,550 335,160 1,758,710 b) Accept
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