“I know headquarters wants us to add that new product line,” said Dell Havasi, m
ID: 2540569 • 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 this year are given below:
The company had an overall return on investment (ROI) of 16.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $2,289,300. The cost and revenue characteristics of the new product line per year would be:
Required:
1. Compute the Office Products Division’s ROI for this year.
2. Compute the Office Products Division’s ROI for the new product line by itself.
3. Compute the Office Products Division’s ROI for next year assuming that it performs the same as this year and adds the new product line.
4. If you were in Dell Havasi’s position, would you accept or reject the new product line?
5. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?
6. Suppose that the company’s minimum required rate of return on operating assets is 13% and that performance is evaluated using residual income.
a. Compute the Office Products Division’s residual income for this year.
b. Compute the Office Products Division’s residual income for the new product line by itself.
c. Compute the Office Products Division’s residual income for next year assuming that it performs the same as this year and adds the new product line.
d. Using the residual income approach, if you were in Dell Havasi’s position, would you accept or reject the new product line?
Sales $ 22,000,000 Variable expenses 13,500,000 Contribution margin 8,500,000 Fixed expenses 6,000,000 Net operating income $ 2,500,000 Divisional average operating assets $ 4,443,500 Connect e https://newconnect.mheducation.com/flow/connect.html?isReg-true&returnUrl;=https%3A%2F%2Fconnect.mheduca Chapter 11 Homework G Help Save &ExSubmit; Saved Check my work 2 . 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. 33.33 polnts 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 this year are given below Skipped Sales Variable expenses Contribution margin Fixed xpenses Net operating income Divisional average operating assete s 22,000, 000 13, 500,000 8, 500, 000 6,000, 000 eBook Print $ 4,443, 500 The company had an overall return on investment (ROI) of 16.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $2,289,300. The cost and revenue characteristics of the new product line per year would be: 9,155, 000 659 of 5a1e5 Variable expenses Fixed expense3 2,543,950 Mc HillExplanation / Answer
1. 56.26%
2. 28.84%
3. 46.94%
Working for 1,2 and 3:
4. Reject the new product line as ROI of new product line is wat below the current line and will reduce the average ROI of the division.
5. Adding the product line would increase the overall Company's ROI. ROI of new product line is 28.84% and the company's ROI is 16%.
6. (a) 1,922,345 (b) 362,691 (c) 2,285,036
Working shown below:
6 (d) Using the residual income approach, the new product line will be accepted as this will generate incremental amount of cash.
Current New Line Total(next year) Sales(a) 22,000,000 9,155,000 31,155,000 Variable expenses(b) 13,500,000 5,950,750 19,450,750 Contribution margin(c=a-b) 8,500,000 3,204,250 11,704,250 Fixed expenses(d) 6,000,000 2,543,950 8,543,950 Net operating income(e=c-d) 2,500,000 660,300 3,160,300 Average operating assets(f) 4,443,500 2,289,300 6,732,800 Margin(g=e/a*100) 11.36% 7.21% 10.14% Turnover(h=a/f) 4.95 4.00 4.63 ROI(i=g*h) 56.26% 28.84% 46.94%Related Questions
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