Question
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
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 | $ | 21,400,000 |
Variable expenses | 13,515,400 | |
Contribution margin | 7,884,600 | |
Fixed expenses | 5,980,000 | |
Net operating income | $ | 1,904,600 |
Divisional operating assets | $ | 5,350,000 |
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 $2,875,000. The cost and revenue characteristics of the new product line per year would be: |
Sales | $ 9,200,000 |
Variable expenses | 65% of sales |
Fixed expenses | $ 2,548,400 |
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.) | ||||||||||||||||
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2. | If you were in Dell Havasis position, would you accept or reject the new product line? | ||
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3. | Why do you suppose headquarters is anxious for the Office Products Division to add the new product line? | ||
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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. | ||||||||||||
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b. | Under these circumstances, if you were in Dell Havasis position, would you accept or reject the new product line? | ||
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