\"l know headquarters wants us to add that new product line. said Dell Havas, ma
ID: 2593206 • Letter: #
Question
"l know headquarters wants us to add that new product line. said Dell Havas, manager of Bilings Company's Office Products Division. "But I want to see the numbers before I make any move. Our division's return on investment (ROD has led the company for three years, year-end bonuses given to the divisional managers who have the highest ROls Operating results for the company's Office Products Division for this year are given below Net operating incone The company had an overall return on operating assets by $2.501,500. The cost and revenue characteristics of the new product line per year would be 65% of sales Products residual incomeExplanation / Answer
1 to 3. This year New line Next year 1.Sales 22045000 9500000 31545000 2.Net operating income 2093000 750900 2843900 (Note:1) 3.Operating assets 5500000 2501500 8001500 4.Margin (2/1) 0.09 0.08 0.09 5.Turnover (1/3) 4.01 3.80 3.94 6.ROI (4*5) 0.38 0.30 0.36 Notes: 1. Computation of net operating income for new product line : Sales 9500000 Less: Variable expenses @ 65% 6175000 Contribution margin 3325000 Less: Fixed expenses 2574100 Net operating income 750900 4 Reject the new product line since there is a decrease of ROI from 38% to 36%. 5 Headquarters believes that adding the new line would increase the company's oveall ROI. 6A to 6C. Present New line Next year 1.Operating assets 5500000 2501500 8001500 2.Minimum required return 16% 16% 16% 3.Minimum net operating income (1*2) 880000 400240 1280240 4.Actual net operating income 2093000 750900 2843900 5.Residual income (4-3) 1213000 350660 1563660 6D. Accept the new product line since residual income is increased from 1213000 to 1563660.
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