know headquarters wants us to add that new product line, said Dell Havasi, manag
ID: 2586672 • Letter: K
Question
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 Contribution margirn Fixed expenses Net operating income Divisional operating assets S 22,000,000 8,500,000 6,000,000 500,000 $ 4,443,500 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 $2,289,300. The cost and revenue characteristics of the new product line per year would be: Sales Variable expenses Fixed expenses 9,155,000 65% of sales $2,543,950 Required 1. Compute the Office Products Division's ROl for the most recent year; also compute the ROl as it would appear if the new product line is added. (Round the "Margin", "Turnover" and "ROl" answers to 2 decimal places.) Present New Line Total Sales Net operating income Operating assets Margin Turnover ROIExplanation / Answer
1.
Workings:
2. Reject
Since it would bring down the ROI from 56.26% to 46.94%.
3. Adding the new line would increase the company's overall ROI
4a.
b. Accept
Since residual income with new product line is higher than present residual income.
Present New Line Total Sales 22000000 9155000 31155000 Net operating income 2500000 660300 3160300 Operating assets 4443500 2289300 6732800 Margin 11.36 % 7.21 % 10.14 % Turnover 4.95 times 4.00 times 4.63 times ROI 56.26 % 28.84 % 46.94 %Related Questions
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