"I know headquarters wants us to add that new product line," said Dell Havasi, manager of Bilings Company's Office Products Division But I want to see the numbers before I make any move our division's return on investment (ROhas led the company for three years, and I don't 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 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 $10,000,000 6,000,000 4,000,000 3,200,000 $ 800,000 $ 4,000,eee The company had an overall return on investment (ROI) of 15% this year (considering all divisions) Next year the Office Products Division has an opportunity to add a new product line that would require dditional Investment that would increase average operating assets by $1,000,000. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $2,000,000 60% of sales $640,000 Required: 1. Compute the Office Products Division's ROI for this year 2. Compute the Office Products Division's Rol for the new product line by itself, 3. Compute the Office Products Division's ROI for next year assuming that it performs the same as this year and adds the new product line 4. If yogwere in Dell Havast's position, would you accept or reject the new product line? 5. Why Ho 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 12% 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 itsell 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? Answer is not complete 2. Compute the Office Products Division's ROI for the new product line by itself 3. Compute the Office Products Division's ROI for next year assuming that it performs the same as this year and 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 12% 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 once 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? Answer is not complete Complete this question by entering your answers in the tabs below. Rog 1 to 3 Reg4 Reg 5 Reg A to 6C Reg 6D 1. Compute the Office Products Division's ROI for this year 2. Compute the Office Products Division's Rol for the new product line by itself 3. Compute the Office Products Division's 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 1 decimal place) Show less 1 ROI for this your ROI for the new product in by itsell ROI for next your 20.0 16.0 2 3 10 Reg4 > Answer is not complete. Complete this question by entering your answers in the tabs below. Reg 1 to 3 Reg 4 Reg 5 Reg 6A to 60 Req6D 6. Suppose that the company's minimum required rate of return on operating assets is 12% 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. Show less 1 $ 320,000 2 Residual income for this year Rondual income for the new product line by itself Residual income for next year $ 100,000 $ 40,000 3 ( Req5 Req6D >
