\"l know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2520927 • Letter: #
Question
"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 (ROl) 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 ROl, 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 $22,000,000 Variable expenses 13,500,000 Contribution margin 8,500,000 Fixed expenses Net operating income Divisional operating assets 6,000,000 $ 2,500,000 $ 4,443,500 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 $2,289,300. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $ 9,155,000 65% of sales $ 2,543,950Explanation / Answer
1 Present New line Total Sales 22000000 9155000 31155000 Net operating income 2500000 660300 3160300 Operating assets 4443500 2289300 6732800 Margin 11.36% 7.21% 10.14% Turnover 4.95 4.00 4.63 ROI 56.26% 28.84% 46.94% 4 Present New line Total Operating assets 4443500 2289300 6732800 Minimum required return 13% 13% 13% Minimum Net operating income 577655 297609 875264 Actual Net operating income 2500000 660300 3160300 Minimum Net operating income 577655 297609 875264 Residual income 1922345 362691 2285036
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