Question
I know headquarters wants us to add that new product line, said Dell Havasi, manager of Billings Company's Office Products Division. But I want to
"I know headquarters wants us to add that new product line," said Dell Havasi, manager of Billings Company's Office Products Division. "But I want to see the numbers before I make any move. Our division's return on investment (ROI) has led the company for three years, and I don't 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 company's Office Products Division for the most recent year are given below:
Sales | $21,600,000 |
Variable expenses | 13,710,800 |
Contribution margin | 7,889,200 |
Fixed expenses | 6,053,200 |
Net operating income | $1,836,000 |
Divisional operating assets | $5,400,000 |
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 $2,960,000. The cost and revenue characteristics of the new product line per year would be: |
Sales | $8,880,000 |
Variable expenses | 60% of sales |
Fixed expenses | $2,948,160 |
Requirement 1: |
Compute the Office Products Division's ROI for the most recent year; also compute the ROI as it would appear if the new product line is added.(Round interim calculations and final answers to 2 decimal places. Omit the "%" sign in your response.) |
Return on Investment (ROI) | |
Present | _________________% |
New Line | _________________% |
Total for company | _________________% |
Requirement 2: |
Suppose that the company's minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income. |
(a) | Compute the Office Products Division's residual income for the most recent year; also compute the residual income as it would appear if the new product line is added. (Omit the "$" sign in your response.)
|
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