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 $10,000,000 Variable Expenses $6,000,000 Contribution Margin $4,000,000 Fixed Expenses $3,200,000 Net Operating Income $800,000 Divisional Average Operating Assets $4,000,000 The company had an overall return on investment (ROI) of 15 last year (across 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 $1,000,000 The cost and revenue characteristics of the new product line per year would be Sales $2,000,000 Variable Expenses 60 of sales Fixed Expenses $640,000 Required 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 If you were in Dell Havasis position, would you accept or reject the new product line Explain Why do you suppose headquarters of Billings Company is anxious for the Office Products Division to add the new product line Suppose that the companys minimum required rate of return on operating assets is 12 and that performance is evaluated using residual income 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 Under these circumstances, if you were in Dell Havasis position, would you accept or reject the new product line Explain Suppose Billings five divisions range from sales of $500,000 to $50,000,000, with Dell Havasis Office Product Division sitting in the middle in terms of sales In this scenario, why would evaluating performance using only residual income be a bad idea even though it encourages profitable investments Explain briefly in 1 2 sentences

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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	$10,000,000
Variable Expenses	$6,000,000
Contribution Margin	$4,000,000
Fixed Expenses	$3,200,000
Net Operating Income	$800,000
Divisional Average Operating Assets	$4,000,000

The company had an overall return on investment (ROI) of 15% last year (across 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 $1,000,000. The cost and revenue characteristics of the new product line per year would be:

Sales	$2,000,000
Variable Expenses	60% of sales
Fixed Expenses	$640,000

Required:

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.
If you were in Dell Havasis position, would you accept or reject the new product line? Explain.
Why do you suppose headquarters of Billings Company is anxious for the Office Products Division to add the new product line?
Suppose that the companys minimum required rate of return on operating assets is 12% and that performance is evaluated using residual income. 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. Under these circumstances, if you were in Dell Havasis position, would you accept or reject the new product line? Explain.
Suppose Billings five divisions range from sales of $500,000 to $50,000,000, with Dell Havasis Office Product Division sitting in the middle in terms of sales. In this scenario, why would evaluating performance using only residual income be a bad idea even though it encourages profitable investments? Explain briefly in 1-2 sentences.