“I know headquarters wants us to add that new product line,” said Dell Havasi, m
ID: 2579089 • 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:
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).)
“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.”
Sales $22,900,000 Variable expenses 14,313,400 Contribution margin 8,586,600 Fixed expenses Net operating income Divisional operating assets 6,205,000 $2,381,600 $ 4,580,000 The company had an overall return on investment (ROI) of 17.00% 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 $2,484,500. The cost and revenue characteristics of the new product line per year would be: Sales Variable expenses Fixed expenses $ 9,942,400 65% of sales $ 2,602,240Explanation / Answer
(1) Net operating income of present situation is already given in the question. For New line it is calculated as Sales*(1 - variable expense %) - Fixed expenses. i.e 9942400*0.35 - 2602240
(2) Margin = Net operating Income / Sales * 100 and Turnover = Sales / Net operating assets
(3) ROI = Margin * Turnover
Question - 2 ................Reject
Since, we have decrease in divisional ROI
Question - 3 .................Adding new product line increases the overall ROI
Question - 4
a)
(b) .......................accept
Present New Line Total Sales 22,900,000 9,942,400 32,842,400 Net operating Income 2,381,600 877600 3,259,200 Operating assets 4,580,000 2484500 7,064,500 Margin 10.4 % 8.83 % 9.92 % Turnover 5 4 4.65 ROI 52 % 35.32 % 46.13 %Related Questions
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