\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2571502 • 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 Iis a decentralized wholesaler with five autonomous divislons. The divislons 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 Divislon for this year are given below: Sales Variable expenses Contribution margi Fixed Net operating income Divisional average operating assets 21,400,000 13,515,400 7,884,600 5,980,000 1.904 600 $ 5,350,000 expenses The company had an overall return on investment (ROI) of 16.00% this year (considering all divisions)·Next year the Office Products Divislon has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $2,875,000. The cost and revenue characteristics of the new product line per year would be: Sales Variable expenses Fixed expenses $9,200,000 65% of sales $2,548,400 Required: 1. Compute the Office Products Division's ROl for this year. 2. Compute the Office Products Division's ROl for the new product line by Itself. 3. Compute the Office Products Division's ROl 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?Explanation / Answer
Calculate ROI and residual income :
Present line New product Line Present with new product line Sales 21400000 9200000 30600000 Net operating income 1904600 672000 2576600 Average operating assets 5350000 2875000 8225000 ROI 35.6% 23.4% 31.3% Residual income 1209100 298250 1507350Related Questions
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