Problem 9-18A Return on Investment (ROI) and Residual Income [LO9-1, LO9-2] “I k
ID: 2446037 • Letter: P
Question
Problem 9-18A Return on Investment (ROI) and Residual Income [LO9-1, LO9-2]
“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 17.00% 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 $2,326,200. The cost and revenue characteristics of the new product line per year would be:
1. 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).)
Present New Line Total
Sales _______ ________ ______
New Operating Income _______ ________ ______
Operating Assets _______ ________ _______
Margin _______% ________% _______%
Turnover ________ ________ ________
ROI ________% _______% ________%
Suppose that the company’s minimum required rate of return on operating assets is 14.00% 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).)
Present New Line Total
Operating Assets ________ ________ ______
Minimum required return ________% ________% ______%
Minimum net operating income _________ ________ _______
Actual net operating income _________ ________ _______
Minimum new operating income _________ ________ _______
Residual Income _________ ________ _______
“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
Details
Details
Minimum Net Opearting Income
New Product profitability Details Amt $ Sales 9,300,000 Less Variable expense 6,045,000 Less Fixed Expense 2,557,400 Net Income 697,600 Additional operating asset 2,326,200 ans 1.Details
Present New line Total Sales 21,600,000 9,300,000 30,900,000 - Net Operating Income 1,967,400 697,600 2,665,000 - Operating Assets 4,499,200 2,326,200 6,825,400 Margin % =net income/sales % 9.11% 7.50% 8.62% Turnover (asset) =sales/operating assets 4.80 4.00 4.53 ROI % = Net income/operating assets 44% 30% 39% Ans 4Details
Present New line Total Operating Assets 4,499,200 2,326,200 6,825,400 Minimum return required 14% 14% 14%Minimum Net Opearting Income
629,888 325,668 955,556 Actual Net operating income 1,967,400 697,600 2,665,000 Residual Income 1,337,512 371,932 1,709,444Related Questions
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