“I know headquarters wants us to add that new product line,” said Dell Havasi, m
ID: 2532643 • 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:
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:
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. (Do not round intermediate calculations. Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)
If you were in Dell Havasi’s position, would you accept or reject the new product line?
Reject
Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?
Adding the new line would Decrease the company's overall ROI.
Suppose that the company’s minimum required rate of return on operating assets is 14.00% and that performance is evaluated using residual income.
Compute the Office Products Division’s residual income for the most recent year; also compute the residual income as it would appear if the new product line is added. (Enter your Minimum Required Rate as a whole percentage (i.e., 0.12 should be entered as 12).)
Under these circumstances, if you were in Dell Havasi’s position, would you accept or reject the new product line?
“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.”
Explanation / Answer
ans 1 Present New Line Total Sales S $21,902,000 9450000 $31,352,000 Net operating income N 2058400 737300 $2,795,700 Operating assets O 4562500 2250500 $6,813,000 Margin M=N/S*100 9.40 7.80 8.92 % Turnover T= S/O 4.80 4.20 4.60 ROI M*T 45.12 32.76 41.03 % working New Line Sales 9450000 Variable expenses 6142500 Fixed expenses 2570200 Net operating income N 737300 ans 2 Reject as new line ROI is lower than present situation ANS 3 Adding the new line would Decrease the company's overall ROI. ans 4] Present New Line Total Operating assets 4562500 2250500 6813000 Minimum required return 14% 14% 14% % Minimum net operating income 638750 315070 953820 Actual net operating income 2058400 737300 2795700 Minimum net operating income 638750 315070 953820 Residual income 1419650 422230 1841880 b) accept as positive residual income
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