“I know headquarters wants us to add that new product line,” said Dell Havasi, m
ID: 2464697 • 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 $2,600,000. The cost and revenue characteristics of the new product line per year would be:
“I know headquarters wants us to add that new product line,” said Dell Havasi, manager of Billings Company’s Office Products Division. “But I want to see the numbers before I make any move. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.”
Required 1. Compute the Office Products Division's ROl for the most recent year; also compute the ROl as it would appear if the new product line is added. (Round the "Margin", "Turnover" and "ROI" answers to 2 decimal places.) Present New Line Total Sales Net operating income 1,844,440 Operating assets$ Margin Turnover ROI $ 21,200,000 646,100 18.10% 2. If you were in Dell Havasi's position, would you accept or reject the new product line? Accept RejectExplanation / Answer
Present
New line
total
Sales
21,200,000
9,100,000
30,300,000
Net operating income
1,844,000
646,100
2,490,100
Operating
assets
4,240,000
2,600,000
6,840,000
Margin
8.7%
17.1%
8.23%
Turnover
5
3.5
4.43
ROI
43.5
24.85
36.46
2) Reject
3( Adding the new line would decrease the company’s overall ROI
4)
Present
New line
total
Operating assets
4,240,000
2,600,000
6,840,000
Minimum required return
16%
16%
16%
Minimum net operating income
678,400
416,000
1094,400
Acual net operating income
1,844,000
646,100
2,490,100
minimum
678,400
416,000
1,094,400
Residual income
1,165,600
230,100
1,395,700
5)Accept
Present
New line
total
Sales
21,200,000
9,100,000
30,300,000
Net operating income
1,844,000
646,100
2,490,100
Operating
assets
4,240,000
2,600,000
6,840,000
Margin
8.7%
17.1%
8.23%
Turnover
5
3.5
4.43
ROI
43.5
24.85
36.46
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