"I know headquarters wants us to add that new product line," said Dell Havasi, manager of Billings Company's Office Products Division "But I want to see the numbers before I make any move. Our division's return on investment (RO) has led the company for three years, and I don't want any letdown." Billings Company is a decentralized wholesale 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 ROls. Operating results for the company's Office Products Division for this year are given below. Sales Variable expenses Contribution margin Fixed expenses Net operating income Divisional average operating assets $ 22,680,000 24 157,400 8,442,600 6 160.000 $ 2,282.600 $ 4,520,000 The company had an overall return on investment (RON of 16.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $2.450,000. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses 59,000,000 65 of sales $2,595,000 UIVIDIUL 05 OPPORTLY LO JUU allew proUULLE udt WULIU TEYDI GULILIIDI VESTUIAL WUUU Hease averaye operating assets by $2,450,000. The cost and revenue characteristics of the new product line per year would be: Sales Variable expenses Fixed expenses $9,880,000 65% of sales $2,595,000 Required: 1. Compute the Office Products Division's margin, turnover, and ROI for this year 2. Compute the Office Products Division's margin, turnover, and ROI for the new product line by itselt 3. Compute the Office Products Division's margin, turnover, and ROI for next year assuming that it performs the same as this year an adds the new product line 4. If you were in Dell Havasi's position, would you accept or reject the new product line? 5. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line? 6. Suppose that the company's minimum required rate of return on operating assets is 13% and that performance is evaluated using residual income a. Compute the Office Products Division's residual income for this year b. Compute the Office Products Division's residual income for the new product line by itself c. Compute the Office Products Division's residual income for next year assuming that it performs the same as this year and adds the new product line. d. Using the residual income approach, if you were in Dell Havasi's position, would you accept or reject the new product line? Complete this question by entering your answers in the tabs below. Complete this question by entering your answers in the tabs below. Req 1 to 3 Reg 4 Req 5 Req 6A to 60 Reg 6D 6. Suppose that the company's minimum required rate of return on operating assets is 135 evaluated using residual income. a. Compute the Office Products Division's residual income for this year. b. Compute the Office Products Division's residual income for the new product line by itself c. Compute the Office Products Division's residual income for next year assuming that it pe adds the new product line. 1. 2. 3. Residual income for this year Residual income for the new product line by itself Residual income for next year $ 1.695,000 $ 236,500 $ 1.931,500 X 1. Compute the Office Products Division's margin, turnover, and ROI for this year. 2. Compute the Office Products Division's margin, turnover, and ROI for the new product line by itself. 3. Compute the Office Products Division's margin, turnover, and ROI for next year assuming that it performs the same as this year and adds the new product line. (Do not round Intermediate calculations. Round your answers to 2 decimal places.) Show less 1 50.50 2 ROI for this year ROI for the new product line by itself ROI for next year 40.68 % 3 % Req 4 > Billings Company is a decentralized wholesaler with five autonomous divisic year-end bonuses given to the divisional managers who have the highest R Division for this year are given below: Sales Variable expenses Contribution margin Fixed expenses Net operating income Divisional average operating assets $ 22,600,000 14, 157, 400 8, 442,600 6,160,000 $ 2, 282,600 $ 4,520,000 The company had an overall return on investment (ROI) of 16.00% this year (c Division has an opportunity to add a new product line that would require an a operating assets by $2,450,000. The cost and revenue characteristics of the Sales Var ble expenses Fixed expenses $9,800,000 65% of sales $2,595,000
