“I know headquarters wants us to add that new product line,” said Dell Havasi, m

ID: 2462412 • 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 19.00% 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 $2,600,000. 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 16.00% 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?

Explanation / Answer

Most Recent ROI = Net Income/Divisional operating assets

Most Recent ROI = 1844400/4240000

Most Recent ROI = 43.5%

Net income would increase by = 9100000-65%*9100000- 2538900

Net income would increase by = $ 646,100

ROI as it would appear if the new product line is added = (1844400+646100)/(4240000+2600000)

ROI as it would appear if the new product line is added = 36.41%

If you were in Dell Havasi’s position, would you accept or reject the new product line?

Reject

Note: Since it would decrease the divisional ROI where performance of Manager is evaluated on the basis of ROI from the acceptance it would decrease the chance of bonus to Dell Havasi’s

3)Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?

Adding the new line would Increase the company's overall ROI

Note : As company ROI is 19% whereas investment in this new product line, ROI would be = 646100/2600000 = 24.85% which is higher than company overall ROI

Office Products Division’s residual income for the most recent year = Net Income - Operating Asset*minimum required rate of return

Office Products Division’s residual income for the most recent year = 1844400 - 4240000*16%

Office Products Division’s residual income for the most recent year = 1166000

Residual income as it would appear if the new product line is added = 1166000 + (646100 - 2600000*16%)

Residual income as it would appear if the new product line is added = 1396100

Under these circumstances, if you were in Dell Havasi’s position, would you accept or reject the new product line?

Note : Since it increase residual income therefore Dell Havasi should accept the new product line

Navigate

“I know headquarters wants us to add that new product line,” said Dell Havasi, m

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.

“I know headquarters wants us to add that new product line,” said Dell Havasi, m

Question

Explanation / Answer

Related Questions

Navigate