\"I know headquarters wants us to add that new product line,\" said Dell Havasi,

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 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 the most recent year are given below: Sales 22,440,000 Variable expenses 14,094,600 Contribution margin 8,345,400 Fixed expenses Net operating income Divisional operating asset 6,130,000 $ 2,215,400 S 4,480,000 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 $2,430,600. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $9,705,000 65% of sales $2,591,710

Explanation / Answer

Margin =Net operating income/Sales Turnover = Sales/Operating assets ROI = Margin*Turnover 1 Present New line Total Sales 22440000 9705000 32145000 Net operating income 2215400 805040 3020440 Operating assets 4480000 2430600 6910600 Margin 9.87% 8.30% 9.40% Turnover 5.01 3.99 4.65 ROI 49.45% 33.12% 43.71% 4 Present New line Total Operating assets 4480000 2430600 6910600 Minimum required return 15% 15% 15% Minimum Net operating income 672000 364590 1036590 Actual Net operating income 2215400 805040 3020440 Minimum Net operating income 672000 364590 1036590 Residual income 1543400 440450 1983850

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