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

$

21,902,000

Variable expenses

13,788,600

Contribution margin

8,113,400

Fixed expenses

6,055,000

Net operating income

$

2,058,400

Divisional operating assets

$

4,562,500

The company had an overall return on investment (ROI) of 18.00% 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 $2,250,500. The cost and revenue characteristics of the new product line per year would be:

Sales

$ 9,450,000

Variable expenses

65% of sales

Fixed expenses

$ 2,570,200

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. (Do not round intermediate calculations. Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

	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.

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 14.00% 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. (Enter your Minimum Required Rate as a whole percentage (i.e., 0.12 should be entered as 12).)

	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