\"I know headquarters wants us to add that new product line,\" said Dell Havasi,
ID: 2580529 • 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 (ROl) 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 $ 22,045,000 Variable expenses 13,882,000 Contribution margin 8,163,000 Fixed expenses Net operating income Divisional operating assets 6,070,000 $ 2,093,000 $ 5,500,000 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 $2,501,500. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $9,500,000 65% of sales $2,574,100Explanation / Answer
Margin = Net operating income/Sales Turnover = Sales/Operating assets ROI = Margin*Turnover 1 Present New line Total Sales 22045000 9500000 31545000 Net operating income 2093000 750900 2843900 Operating assets 5500000 2501500 8001500 Margin 9.49% 7.90% 9.02% Turnover 4.01 3.80 3.94 ROI 38.05% 30.02% 35.54% 2 Reject 3 Adding the new product line would increase company's overall ROI 4 Present New line Total Operating assets 5500000 2501500 8001500 Minimum required return 13% 13% 13% Minimum net operating income 715000 325195 1040195 Actual net operating income 2093000 750900 2843900 Minimum net operating income 715000 325195 1040195 Residual income 1378000 425705 1803705 4b Accept
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