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 a decision. 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 using 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	$ 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% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product requiring $1,000,000 of additional average operating assets. The annual cost and revenue estimates for the new product would be:

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

Required:

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

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

Compute the Office Products Divisions margin, turnover, and ROI for next year assuming it performs the same as this year and adds the new product.

If you were in Dell Havasis position, would you accept or reject the new product?

Why do you suppose headquarters is anxious for the Office Products Division to add the new product?

Suppose the companys minimum required rate of return on operating assets is 12% and performance is evaluated using residual income.

Compute the Office Products Divisions residual income for this year.

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

Compute the Office Products Divisions residual income for next year assuming it performs the same as this year and adds the new product.

Using the residual income approach, if you were in Dell Havasis position, would you accept or reject the new product?

omplete this question by entering your answers in the tabs below.

• Required 1 to 3
• Required 4
• Required 5
• Required 6A to 6C
• Required 6D

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 by itself. 3. Compute the Office Products Divisions margin, turnover, and ROI for next year assuming it performs the same as this year and adds the new product. Note: Do not round intermediate calculations. Round your answers to 1 decimal place.

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	Margin	Turnover	ROI
1. Margin, turnover, and ROI for this year		%			%
2. Margin, turnover, and ROI for the new product line by itself	8.0	%	2.0	16.0	%
3. Margin, turnover, and ROI for next year		%			%

If you were in Dell Havasis position, would you accept or reject the new product?

Why do you suppose headquarters is anxious for the Office Products Division to add the new product?

6. Suppose the companys minimum required rate of return on operating assets is 12% and 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 by itself.

c. Compute the Office Products Divisions residual income for next year assuming it performs the same as this year and adds the new product.

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1. Residual income for this year
2. Residual income for the new product line by itself
3. Residual income for next year

Using the residual income approach, if you were in Dell Havasis position, would you accept or reject the new product?