2 \"l know headquarters wants us to add that new product line,\" said Dell Havas

Question

2 "l 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." 10 points 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 this year are given below: Skipped Sales Variable expenses Contribution margin Fixed expenses Net operating income Divisional average operating assets 22,900,000 14,313,400 8,586,600 6,205,000 $ 2,381,600 4,580,000 eBook Print References The company had an overall return on investment (ROI) of 17.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $2,484,500. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $9,942,400 65% of sales $2,602,240

Explanation / Answer

Net operating income new product=9942400*(1-0.65)-2602240= $877600 1 ROI this year 52% =2381600/4580000 ROI new product line 35.32% =877600/2484500 ROI next year 46.13% =(2381600+877600)/(4580000+2484500) 4 Reject 5 Adding the new product line would increase company's overall ROI 6 Residual income this year 1786200 =2381600-(4580000*13%) Residual income new product 554615 =877600-(2484500*13%) Residual income next year 2340815 =1786200+554615 6d Accept

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