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 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 | $ 22,700,000 |
---|---|
Variable expenses | 14,363,700 |
Contribution margin | 8,336,300 |
Fixed expenses | 6,175,000 |
Net operating income | $ 2,161,300 |
Divisional average operating assets | $ 5,675,000 |
The company had an overall return on investment (ROI) of 16.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product requiring $3,938,000 of additional average operating assets. The annual cost and revenue estimates for the new product would be:
Sales | $ 9,800,000 | |
---|---|---|
Variable expenses | 65 | % of sales |
Fixed expenses | $ 2,582,900 |
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 13% 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?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started