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 | $ | 10,000,000 |
Variable expenses | 6,000,000 | |
Contribution margin | 4,000,000 | |
Fixed expenses | 3,200,000 | |
Net operating income | $ | 800,000 |
Divisional operating assets | $ | 4,000,000 |
The company had an overall return on investment (ROI) of 15% 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 $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: | |
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 "Turnover", "ROI" answers to 1 decimal place.) |
4. | Suppose that the companys minimum required rate of return on operating assets is 12% 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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