M N C D E F G 1 "I know headquarters wants us to add that new product line," said Dell Hayasi, 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 2 any ledown." 3 4 Billings Company is a decentralized wholesale 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 this year are 5 given below: 7 Sales $ 22,000,000 # Variable expenses 14,000,000 9 Contribution margin 8,000,000 10 Faxed expenses 6,000,000 11 Net operating income $ 2,000,000 12 Divisional average operating assets $ 4,000,000 13 Divisional average non operating at $ 2,000,000 14 15 The company had an overall return on investment (ROD) af 17.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating by 32.755.000 16. The cost and revenue characteristics of the new product line per year would 17 11. Sales 59,000,000 19 Variable expenses 65% of sales 20 Fixed expo $2,500,000 21 22 23 Required: 24 Compute the Ome Products Divisions ROI for this year 25 27 22. Campuse theme hraduction for poll new prodort line by 20 30 31 Compleomce Podww Division's combined Rol for next year that performed this year and is the new product a3 Instructions 10 12 B C D E F G H 2 3. Compute the Office Products Division's combined ROI for next year assuming that it performs the same as this year and adds the new product line. 3 14 85 36 37 4. If you were in Dell Havasi's position, would you accept or reject the new product line? 38 39 40 41 5. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line? 43 44 45 6. Suppose that the company's minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income 46 47 Compute the Office Products Division's residual income for this year. 48 49 50 51 b. Compute the Office Products Division's residual income for the potential new product line by itself. 52 sa 54 55 c. Compute the Office Products Division's residual income for next year Asuming that it performs the same as this year and adds the new product line. 56 57 59 d. Using the residual income approach, if you were in Dell Havasi's position, would you accept or reject the new product line? 50 1 62 63
