\"I know headquarters wants us to add on that new product line,\" said Dell Hava
ID: 2530806 • Letter: #
Question
"I know headquarters wants us to add on 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 has led the company for three years, and don't want any letdown. Billings Company is a decentralized organization with five autonomous divisions. The divisions are evaluated on the basis of the return that they are able to generate on invested assets, with year-end bonuses given to the divisional managers who have the highest ROl figures. Operating results for the company's office products division for the most recent year are as follows Sales $92,500,000 Less: Variable expenses 60,125,000 Contribution margin 32,375,000 Less: Fixed expenses Net operating income Divisional operating assets 25,900,000 $ 6,475,000 $37,000,000 The company had an overall ROI of 13.0% 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 $9,250,000. The cost and revenue characteristics of the new product line per year would be as follows Sales Variable expenses Fixed expenses $18,500,000 65% of sales $ 5,180,000 Required 1. Compute the office products division's ROl for the most recent year, also compute the ROl if the new product line were added. (Do not round intermediate calculations. Round "Percentage" answers to 2 decimal places, (i.e., 0.1234 should be considered as 12.34%).) Present New Line Total ROExplanation / Answer
income on new line contribution (18,500,000*35%)= 6,475,000 less Fixed expense -5,180,000 Net operating income 1295000 1,2&3) present new line total Sales 92,500,000 18,500,000 111,000,000 Net operating income 6,475,000 1,295,000 7,770,000 operating assets 37,000,000 9,250,000 46,250,000 margin 7.00% 7.00% 7.00% turnover 2.50 2.00 2.40 ROI 17.50% 14.00% 16.80% where margin = net operating income/sales turnover = sale/average operating assets ROI = margin *turnover 4) Reject 5) Addint the new product line would improve overall ROI 6) Residual income = net operating income -(average assets *min rate or return) present new line total operating assets 37,000,000 9,250,000 46,250,000 minimum required return 12% 12% 12% min net opeerating income 4440000 1110000 5550000 actual net operating income 6,475,000 1,295,000 7,770,000 min net operating income 4440000 1110000 5550000 residual income 2,035,000 185,000 2,220,000 b) Accept
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