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

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 ROls. Operating results for the company's Office Products Division for the most recent year are given below: Sales $22,100,000 Variable expenses 13,893,400 Contribution margin 8,206,600 Fixed expenses Net operating income Divisional operating assets 6,085,000 $ 2,121,600 $5,200,000 The company had an overall return on investment (ROI) of 16.00% 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 $2,387,500. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $ 9,550,000 65% of sales $2,578,500

Explanation / Answer

Present New Line New Line Sales 22100000 9550000 31650000 Net Operating Income 2121600 764000 2885600 Operating Asset 5200000 2387500 7587500 Margin 9.60% 8.00% 9.12% Turnover 4.25 4           2.63 ROI 40.80% 32.00% 38.03% New Line Sales 9550000 Variable Expense 6207500 Contribution margin 3342500 Fixed expense 2578500 Net Operating Income 764000 Present Total Total Operating Asset 5200000 2387500 7587500 Minimum Requried Return 12% 12% 12% Minimum Net Operating Income 624000 286500 910500 Actual Net Operating Income 2121600 764000 2885600 Minimum Net Operating Income 624000 286500 910500 Residual Income 1497600 477500 1975100

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