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 $ 22,700,000

Variable expenses 14,363,700

Contribution margin 8,336,300

Fixed expenses 6,175,000

Net operating income $ 2,161,300

Divisional operating assets $ 5,675,000

The company had an overall return on investment (ROI) of 16.00% 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 $3,938,000. The cost and revenue characteristics of the new product line per year would be:

Sales $ 9,800,000

Variable expenses 65% of sales

Fixed expenses $ 2,582,900

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 ROI

2.

If you were in Dell Havasis 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.? or

Adding the new line would Decrease the company's overall ROI.?

4.

Suppose that the companys minimum required rate of return on operating assets is 13.00% 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

b.

Under these circumstances, if you were in Dell Havasis position, would you accept or reject the new product line?

Accept

Reject