managerial accounting
\"I know headquarters wants us to add that new product line," said Dell Havasi, manager of Billings Company's Ofce 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 ROls. Operating results for the company's Ofce Products Division for this year are given below: Sales $ 22,900,000 Variable expenses 14,313,400 Contribution margin 8,586,600 Fixed expenses 6,205,000 Net operating income $ 2,381,600 Divisional average operating assets $ 4,580,000 The company had an overall return on investment (ROI) of 17.00% this year (considering all divisions). Next year the Ofce Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $2,484,500. The cost and revenue characteristics of the new product line per year would be: Sales $9,942,400 Variable expenses 65% of sales Fixed expenses $2,602,240 I Required: 1. Compute the Ofce Products Division's ROI for this year. 2. Compute the Ofce Products Division's ROI for the new product line by itself. 3. Compute the Ofce Products Division's ROI for next year assuming that it performs the same as this year and adds the new product line. 4. If you were in Dell Havasi's position, would you accept or reject the new product line? 5. Why do you suppose headquarters is anxious for the Ofce Products Division to add the new product line? 6. Suppose that the company's minimum required rate of return on operating assets is 13% and that performance is evaluated using residual income. a. Compute the Ofce Products Division's residual income for this year. b. Compute the Ofce Products Division's residual income for the new product line by itself. c. Compute the Ofce Products Division's residual income for next year assuming that it performs the same as this year and adds the new product line. d. Using the residual income approach, if you were in Dell Havasi's position, would you accept or reject the new product line? Complete this question by entering your answers in the tabs below. Req 1 to 3 Req 4 Req 5 Req 6A to SC Req 6D 1. Compute the Office Products Division's ROI for this year. 2. Compute the Ofce Products Division's ROI for the new product line by itself. 3. Compute the Office Products Division's ROI for next year assuming that it performs the same as this year and adds the new product line. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Show IessA 1. ROI for this year ROI for the new product line by ' itself n Residual income for this year _ Residual income for the new product line by itself _ Residual income for next year _
