\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2580028 • 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: 22,600,000 Sales Variable expenses 14,157,400 Contribution margin Fixed expenses 8,442,600 6,160,000 $ 2,282,600 $ 4,520,000 et operating income Divisional operating assets 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 $2,450,000. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $9,800,000 65% of sales $ 2,595,000Explanation / Answer
Margin =Net operating income/Sales Turnover = Sales/Operating assets ROI = Margin*Turnover 1 Present New line Total Sales 22600000 9800000 32400000 Net operating income 2282600 835000 3117600 Operating assets 4520000 2430600 6950600 Margin 10.10% 8.52% 9.62% Turnover 5.00 4.03 4.66 ROI 50.50% 34.35% 44.85% 2 Reject 3 Adding the new line would increase the company's overall ROI 4 Present New line Total Operating assets 4520000 2430600 6950600 Minimum required return 13% 13% 13% Minimum Net operating income 587600 315978 903578 Actual Net operating income 2282600 835000 3117600 Minimum Net operating income 587600 315978 903578 Residual income 1695000 519022 2214022
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