\"I know headquarters wants us to add that new product line,\" said Dell Havasi.
ID: 2479792 • 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 $2,326,200. The cost and revenue characteristics of the new product line per year would be: Required: 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. (Do not round intermediate calculations. Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)Explanation / Answer
1.
Calculate the office products divisions ROI for the most recent year, also compute the ROI if the new product line added:
Details
Present
New line
Total
Sales
$ 21,600,000
$ 9,300,000
$ 30,900,000
Net operating income Note 1
$ 1,967,400
$ 697,600
$ 2,665,000
Operating assets
$ 4,499,200
$ 2,326,200
$ 6,825,400
Margin Note 2
(Gross profit / Sales)*100
9.11
7.5
Turnover
$ 21,600,000
$ 9,300,000
$ 30,900,000
ROI Note 3
43.73
29.99
39.05
Note 1:
Net operating income for new line:
= Sales – Variable cost – Fixed cost
= $9,300,000 - $6,045,000 - $2,557,400
= $697,600
Note 2:
Margin:
For Present:
= (Gross profit / Sales)*100
= ($21,600,000 - $ 19,632,600 / $ $21,600,000) *100
= 9.11%
For New line:
= (Gross profit / Sales)*100
= ($9,300,000 - $8,602,400 / $9,300,000)*100
= 7.50%
Note 3
ROI:
For Present:
= Net income / operating assets
= $1,967,400 / $4,499,200
= 43.73%
For new line:
= Net income / operating assets
= $697,600 / $9,300,000
= 29.99%
2.
Therefore, the correct answer is Reject the new line project.
3.
Therefore, the correct answer is adding the new line would decrease the company’s overall ROI.
4.
a.
Compute the Residual income for Present line and new line:
Details
Present
New line
Total
Operating assets
$ 4,499,200
$ 2,326,200
$ 6,825,400
Minimum required rate of return
14
14
14
Minimum net operating income
$ 629,888.00
$ 325,668.00
$ 955,556.00
Actual net operating income
$ 1,967,400
$ 697,600
$ 2,665,000
Minimum net operating income
$ 88,184.32
$ 45,593.52
$ 133,777.84
Residual income
$ 1,879,215.68
$ 652,006.48
$ 2,531,222.16
b.
Therefore, the correct answer is Accept the new line project.
Details
Present
New line
Total
Sales
$ 21,600,000
$ 9,300,000
$ 30,900,000
Net operating income Note 1
$ 1,967,400
$ 697,600
$ 2,665,000
Operating assets
$ 4,499,200
$ 2,326,200
$ 6,825,400
Margin Note 2
(Gross profit / Sales)*100
9.11
7.5
Turnover
$ 21,600,000
$ 9,300,000
$ 30,900,000
ROI Note 3
43.73
29.99
39.05
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.