I know headquarters wants us to add on that new product line, said Dell Havasi, manager of Billings Companys office products division. But I want
I know headquarters wants us to add on 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 division has led the company for three years, and I dont want any letdown. |
Billings Company is a decentralized organization with five autonomous divisions. The divisions are evaluated on the basis of the return that they are able to generate on invested assets, with year-end bonuses given to the divisional managers who have the highest ROI figures. Operating results for the companys office products division for the most recent year are as follows: |
Sales | $ | 235,000,000 | |
Less: Variable expenses | 164,500,000 | ||
Contribution margin | 70,500,000 | ||
Less: Fixed expenses | 56,400,000 | ||
Net operating income | $ | 14,100,000 | |
Divisional operating assets | $ | 47,000,000 | |
The company had an overall ROI of 11.5% 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 $23,500,000. The cost and revenue characteristics of the new product line per year would be as follows: |
Sales | $ | 47,000,000 | |
Variable expenses | 70 | % of sales | |
Fixed expenses | $ | 11,280,000 | |
Required: |
1. | Compute the office products divisions ROI for the most recent year; also compute the ROI if the new product line were added. (Do not round intermediate calculations. Round "Percentage" answers to 2 decimal places, (i.e., 0.1234 should be considered as 12.34%).) |
present | new line | total | |
ROI |
2. | If you were in Dell Havasis position, would you be inclined to accept or reject the new product line? | ||||
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3. | Not available in Connect. |
4. | Suppose that the company views a return of 11.0% on invested assets as being the minimum that any division should earn and that performance is evaluated by the RI approach. |
a. | Compute the office products divisions RI for the most recent year; also compute the RI as it would appear if the new product line were added. |
present | new line | total | |
ROI |
b. | Under these circumstances, if you were in Dell Havasis position, would you accept or reject the new product line? | ||||
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