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 this year are given below:

Sales	$ 22,235,000
Variable expenses	13,981,800
Contribution margin	8,253,200
Fixed expenses	6,100,000
Net operating income	$ 2,153,200
Divisional average operating assets	$ 4,625,000

The company had an overall return on investment (ROI) of 17.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $2,400,000. The cost and revenue characteristics of the new product line per year would be:

Sales	$ 9,600,000
Variable expenses	65% of sales
Fixed expenses	$ 2,582,400

Required:

1. Compute the Office Products Divisions margin, turnover, and ROI for this year.

2. Compute the Office Products Divisions margin, turnover, and ROI for the new product line by itself.

3. Compute the Office Products Divisions margin, turnover, and 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 Havasis 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 companys minimum required rate of return on operating assets is 14% and that performance is evaluated using residual income.

a. Compute the Office Products Divisions residual income for this year.

b. Compute the Office Products Divisions residual income for the new product line by itself.

c. Compute the Office Products Divisions 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 Havasis position, would you accept or reject the new product line?

In each of the cases below, assume Division X has a product that can be sold either to outside customers or to Division Y of the same company for use in its production process. The managers of the divisions are evaluated based on their divisional profits.

	Case
	A	B
Division X:
Capacity in units	94,000	94,000
Number of units being sold to outside customers	94,000	78,000
Selling price per unit to outside customers	$ 53	$ 34
Variable costs per unit	$ 29	$ 13
Fixed costs per unit (based on capacity)	$ 8	$ 4
Division Y:
Number of units needed for production	16,000	16,000
Purchase price per unit now being paid to an outside supplier	$ 46	$ 26

Required:

1. Refer to the data in case A above. Assume in this case that $3 per unit in variable selling costs can be avoided on intracompany sales.

a. What is the lowest acceptable transfer price from the perspective of the selling division?

b. What is the highest acceptable transfer price from the perspective of the buying division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place?

2. Refer to the data in case B above. In this case, there will be no savings in variable selling costs on intracompany sales.

a. What is the lowest acceptable transfer price from the perspective of the selling division?

b. What is the highest acceptable transfer price from the perspective of the buying division?

c. What is the range of acceptable transfer prices (if any) between the two divisions? If the managers are free to negotiate and make decisions on their own, will a transfer probably take place?