I know headquarters wants us to add that new product line,\" said Dell Havasi, m

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 (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 $ 21,902,000 Variable expenses 13,788,600 Contribution margin 8,113,400 Fixed expenses Net operating income Divisional operating assets 6,055,000 $ 2,058,400 $4,562,500 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 $2,250,500. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $9,450,000 65% of sales $2,570,200 Required 1. Compute the Office Products Division's ROl for the most recent year; also compute the ROl 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 ROl percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

Explanation / Answer

income on new line contribution (9,450,000*35%)= 3,307,500 less Fixed expense -2,570,200 Net operating income 737300 1,2&3) present new line total Sales 21,902,000 9,450,000 31,352,000 Net operating income 2,058,400 737,300 2,795,700 operating assets 4,562,500 2,250,500 6,813,000 margin 9.40% 7.80% 8.92% turnover 4.80 4.20 4.60 ROI 45.12% 32.76% 41.03% 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 4,562,500 2,250,500 6,813,000 minimum required return 14% 14% 14% min net opeerating income 638750 315070 953820 actual net operating income 2,058,400 737,300 2,795,700 min net operating income 638750 315070 953820 residual income 1,419,650 422,230 1,841,880 b) Accept

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