12-4

I know headquarters wants us to add that new product line, said Dell Havasi, manager of Billings Companys Office Products Division. But I want to see the numbers before I make any move. Our divisions return on investment (ROI) has led the company for three years, and I dont 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 ROIs. Operating results for the companys Office Products Division for the most recent year are given below:

Sales	$	22,835,000
Variable expenses		14,297,200
Contribution margin		8,537,800
Fixed expenses		6,190,000
Net operating income	$	2,347,800
Divisional operating assets	$	4,000,000

The company had an overall return on investment (ROI) of 17.00% 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 $2,755,000. The cost and revenue characteristics of the new product line per year would be:

Sales	$ 9,915,000
Variable expenses	65% of sales
Fixed expenses	$2,607,450

Required:

1. Compute the Office Products Divisions ROI for the most recent year; also compute the ROI as it would appear if the new product line is added. (Round the "Margin", "Turnover" and "ROI" answers to 2 decimal places.)

	Present		New Line		Total
Sales
Net operating income
Operating assets
Margin		%		%		%
Turnover		times		times		times
ROI		%		%		%

4. Suppose that the companys minimum required rate of return on operating assets is 14.00% and that performance is evaluated using residual income.

a. Compute the Office Products Divisions residual income for the most recent year; also compute the residual income as it would appear if the new product line is added.

	Present		New Line		Total
Operating assets
Minimum required return		%		%		%
Minimum net operating income
Actual net operating income
Minimum net operating income
Residual income