Question
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
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 | ||||||
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