“I know headquarters wants us to add that new product line,” said Dell Havasi, m
ID: 2454597 • 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 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 $2,250,500. 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. (Round the "Margin", "Turnover" and "ROI" answers to 2 decimal places.)
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 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.
Under these circumstances, if you were in Dell Havasi’s position, would you accept or reject the new product line?
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:
Explanation / Answer
1. ROI = (Net operating profit before interest and tax/Capital employed)*100
Statement showing calculation of ROI
Working
Net operating Income after introducing new product = $2058400+$9450000*35%-$2570200
= $2795700
2. Due to introduction of new project division ROI reduces from 45.11% ti 41.03%, therefore we would have rejected the new product line
3. Head quarters may be anxious to introduce new project in order to increase overall revenue of the company
4 Residual income income on new product = 737300 - 2250500*14%
= 422230
In that scenario new product will be acceptable since the focus is on generation the revenue.
(a) Residual income ( before new product) = 2058400 - 4562500*14%
= 1496650
(b) Residual income ( after new product) = 2795700 - 6813000*14%
= 1841880
Particulars Before new product line After new product line Net operating Income (given) $2058400 $2795700 Capital Employed $4562500 $6813000 ROI 45.11% 41.03Related Questions
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