“I know headquarters wants us to add that new product line,” said Dell Havasi, m
ID: 2474397 • 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 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 $3,857,400. The cost and revenue characteristics of the new product line per year would be:
$ 2,583,600
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. (Round the "Margin", "Turnover" and "ROI" answers to 2 decimal places.)
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.
“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
Billing Company Office Products Division ROI Calculation Current ROI Details Amt $ Net operating Income 2,185,400 Divisional Operating Assets 5,575,000 ROI= Net Operating Income/Div Operating Asstes= 39.20% 1.00 So Office Equipment divisons most recent ROI= 39.20% For New Product Line Sales 9,650,000 Less Variable cost @65% 6,272,500 Less Fixed Expenses 2,583,600 Net Operating Income 793,900 Additional Operating assets 3,857,400 So When New Product line adedd Details Amt $ Net operating Income 2,979,300 Divisional Operating Assets 9,432,400 ROI= Net Operating Income/Div Operating Asstes= 31.59% 2a If The min Required return =14% For Most Recent Year Details Amt $ Net operating Income 2,185,400 Divisional Operating Assets 5,575,000 ROI= Net Operating Income/Div Operating Asstes= 39.20% Min Required return amt @14%= 780,500 Residual Income= 2185400-780500= 1,404,900 If New Product line added : Details Amt $ Net operating Income 2,979,300 Divisional Operating Assets 9,432,400 ROI= Net Operating Income/Div Operating Asstes= 31.59% Min Required return amt @14%= 1,320,536 Residual Income=2979300-1320536= 1,658,764
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.