\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2579170 • 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: Sales Variable expenses $ 21,400,000 13,515,400 Contribution margin Fixed expenses 7,884,600 5,980,000 Net operating income $ 1,904,600 Divisional operating assets $ 5,350,000 The company had an overall return on investment (ROI) of 16.00% 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 $2,875,000. 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 $ 2,548,400Explanation / Answer
1.
2. Reject (As the total ROI has reduced)
3. Adding the nwe line would Increase the company's overall ROI.
4.
a.
b. Accept (as Residual income has increased)
Present (1) New Line (2) Total (3) = (1+2) Sales (a) 21,400,000 9,200,000 30,600,000 Net operating income (b) 1,904,600 671,600 [9,200,000-(9,200,000*65%)-2,548,400] 2,576,200 Operating assets (c) 5,350,000 2,875,000 8,225,000 Margin (d) = (b/a) 8.9% 7.3% 8.42% Turnover (e) 21,400,000 9,200,000 30,600,000 ROI (f) = (b/c) 35.6% 23.36% 31.32%Related Questions
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