\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2535497 • 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 ROls. Operating results for the company's Office Products Division for the most recent year are given below 21,100,000 Sales Variable expenses Contribution margin 13,350,400 7749,600 5,935,000 Fixed expenses Net operating income Divisional operating assets $1,814,600 4,220,000 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 $2,262,500. The cost and revenue characteristics of the new product line per year would be:Explanation / Answer
Required - 1
(1) Margin = Net operating Income / Sales * 100
(2) Turnover = Sales / Operating assets
(3) ROI = Margin * turnover
Required - 2 .............. Reject
Divisional manager performance measure falls from 43% to 37.76 %, which will adversly effect his bonus earnings.
Required - 3 ........... Adding new product line increases the company's overall ROI ( OPTION - 1 )
Required - 4
(a)
(b) Accept ................. excess of residual income over minimum required.
Present New line Total Sales 13350400 9050000 22400400 Net Operating Income 1814600 633500 2448100 Operating assets 4220000 2262500 6482500 Margin 13.59 % 7 % 10.93 % Turnover 3.16 4 3.46 ROI 43 % 28 % 37.76 %Related Questions
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