“I know headquarters wants us to add that new product line,” said Dell Havasi, m
ID: 2491357 • 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: Sales $ 22,440,000 Variable expenses 14,094,600 Contribution margin 8,345,400 Fixed expenses 6,130,000 Net operating income $ 2,215,400 Divisional operating assets $ 4,480,000 The company had an overall return on investment (ROI) of 18.00% 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 $2,430,600. The cost and revenue characteristics of the new product line per year would be: Sales $ 9,705,000 Variable expenses 65% of sales Fixed expenses $ 2,591,710 Required: 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
Explanation / Answer
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
Working Notes
Calculation of the net income for the New line
Conclusion
He will be inclined to reject the new product line, since accepting itwould reduce his division’s overall rate of return.
Particular Prasent New Line Total (1)Sales 22440000 9705000 32145000 (2) Operating income . 2215400 805040 3020440 (3) Operating assets . 4480000 2430600 6910600 (4) Margin (2) ÷ (1) . 9.87% 9.30% 9.40% (5) Turnover (1) ÷ (3) . 5 4 4.65 (6) ROI (4) × (5). 49.35% 37.20% 43.71%Related Questions
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