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

$

22,505,000

Variable expenses

14,105,500

Contribution margin

8,399,500

Fixed expenses

6,145,000

Net operating income

$

2,254,500

Divisional operating assets

$

4,687,500

The company had an overall return on investment (ROI) of 17.00% 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 $3,261,000. The cost and revenue characteristics of the new product line per year would be:

Sales

$ 9,750,000

Variable expenses

65% of sales

Fixed expenses

$ 2,595,300

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 "Margin", "Turnover" and "ROI" answers to 2 decimal places.)

Present New Line Total

Sales

Neto Operating Income

Operating Assets

Margin

Turnover

ROI

2.

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

	Accept
	Reject

3.

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

	Adding the new line would Increase the company's overall ROI.
	Adding the new line would Decrease the company's overall ROI.

4.	Suppose that the companys minimum required rate of return on operating assets is 14.00% 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.

Present New Line Total

Operating Assets

Minimum required Return

Minimum net operating income

Actual net operating income

Minimum net operating income

Residual income

b.

Under these circumstances, if you were in Dell Havasis position, would you accept or reject the new product line?

	Accept
	Reject