âI know headquarters wants us to add that new product line,â said Dell Havasi, manager of Billings Companyâs Office Products Division. âBut I want to see the numbers before I make any move. Our divisionâs return on investment (ROI) has led the company for three years, and I donât want any letdown.â
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 ROIs. Operating results for the companyâs Office Products Division for the most recent year are given below:
Sales $ 21,100,000 Variable expenses 13,350,400 Contribution margin 7,749,600 Fixed expenses 5,935,000 Net operating income $ 1,814,600 Divisional operating assets $ 4,220,000
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 $2,262,500. The cost and revenue characteristics of the new product line per year would be:
Sales $ 9,050,000 Variable expenses 65% of sales Fixed expenses $ 2,534,000
Required: 1. Compute the Office Products Divisionâs ROI for the most recent year; also compute the ROI as it would appear if the new product line is added. (Do not round intermediate calculations. Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)
2. If you were in Dell Havasiâs position, would you accept or reject the new product line?
Accept Reject
3. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?
Adding the new line would Increase the company's overall ROI. Adding the new line would Decrease the company's overall ROI.
4. Suppose that the companyâs minimum required rate of return on operating assets is 16.00% and that performance is evaluated using residual income.
a. Compute the Office Products Divisionâs residual income for the most recent year; also compute the residual income as it would appear if the new product line is added. (Enter your Minimum Required Rate as a whole percentage (i.e., 0.12 should be entered as 12).)
âI know headquarters wants us to add that new product line,â said Dell Havasi, manager of Billings Companyâs Office Products Division. âBut I want to see the numbers before I make any move. Our divisionâs return on investment (ROI) has led the company for three years, and I donât want any letdown.â |
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 ROIs. Operating results for the companyâs Office Products Division for the most recent year are given below: |
Sales | $ | 21,100,000 |
Variable expenses | 13,350,400 | |
Contribution margin | 7,749,600 | |
Fixed expenses | 5,935,000 | |
Net operating income | $ | 1,814,600 |
Divisional operating assets | $ | 4,220,000 |
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 $2,262,500. The cost and revenue characteristics of the new product line per year would be: |
Sales | $ 9,050,000 |
Variable expenses | 65% of sales |
Fixed expenses | $ 2,534,000 |
Required: | |
1. | Compute the Office Products Divisionâs ROI for the most recent year; also compute the ROI as it would appear if the new product line is added. (Do not round intermediate calculations. Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) |
2. | If you were in Dell Havasiâs position, would you accept or reject the new product line? | ||||
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3. | Why do you suppose headquarters is anxious for the Office Products Division to add the new product line? | ||||
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4. | Suppose that the companyâs minimum required rate of return on operating assets is 16.00% and that performance is evaluated using residual income. |
a. | Compute the Office Products Divisionâs residual income for the most recent year; also compute the residual income as it would appear if the new product line is added. (Enter your Minimum Required Rate as a whole percentage (i.e., 0.12 should be entered as 12).) |