Problem 10-18 Return on Investment (ROI) and Residual Income [LO10-1, LO10-2] "I know headquarters wants us to add that new product line." said Dell Havast, manager of Billings Company's Office Products DMision "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 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 Rols: Operating results for the company's Office Products Division for this year are given below. $10.000.000 6.100,00 4,000,000 Variable expenses Contribution margin Fixed expenses Net operating Incore Divisional average operating assets $ 54.000.000 The company had an overall return on investment (ROI) of 15% this your 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 assets by $1,000,000. The cost and reverse characteristics of the new product line per year would be Sales Varie Tud Required: 1. Compute the Office Products Division's ROI for this year 2. Compute the Office 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 proc Itne. 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 Office Products Division to add the new product line? 6. Suppose that the company's minimum required rate of return on operating assets is 12% and that performance is evaluated using residual Income a. Compute the Office Products Division's residual income for this year. d. Compute the Office Products Division's residual income for the new product line by itself. c. Compute the Office 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. Red 1 to 2 Reg Reqs Reg A to 6C Reg 60 1. Compute the Office Products Division's Rot for this year 2. Compute the Office 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 found intermediate calculations. Round your answers to 1 decimal place Show 2. Preproduct in by SRO Reg4 > new product line d. Using the residuals.come approach. If you were in Dell Havasi's position, would you accept or reject the new production Complete this question by entering your answers in the tabs below. Reqt to Reg 4 Reg 5 Req 6A LO 6C Req6D If you were in Dell Havasi's position, would you accept or reject the new product line? Accept Reject Req 1 to 3 Req5 > Req 1 to 3 Reg 4 Reg 5 Reg 6A to 60 Req 60 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 ( Req4 Req6A to 6C> 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 Reg 4 Req5 Reg 6A to 6C Req 6D 6. Suppose that the company's minimum required rate of return on operating assets is 12% and that performance is evaluated using residual income. a. Compute the Office Products Division's residual income for this year. 5. Compute the Office Products Division's residual income for the new product line by itself. c. Compute the Office Products Division's residual income for next year assuming that it performs the same as this year and adds the new product line. w Show less 1 Residus income for this year 2 Residual income for the new product line by itself Residual income for next year ( Reqs Reg D > Req 1 to 3 Reg 4 Req5 Rey 6A to 6C Rag 6D Using the residual income approach. if you were in Dell Havasi's position, would you accept or reject the new product line? Accept Reject new product line d. Using the residuals.come approach. If you were in Dell Havasi's position, would you accept or reject the new production Complete this question by entering your answers in the tabs below. Reqt to Reg 4 Reg 5 Req 6A LO 6C Req6D If you were in Dell Havasi's position, would you accept or reject the new product line? Accept Reject Req 1 to 3 Req5 > Req 1 to 3 Reg 4 Reg 5 Reg 6A to 60 Req 60 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 ( Req4 Req6A to 6C> 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 Reg 4 Req5 Reg 6A to 6C Req 6D 6. Suppose that the company's minimum required rate of return on operating assets is 12% and that performance is evaluated using residual income. a. Compute the Office Products Division's residual income for this year. 5. Compute the Office Products Division's residual income for the new product line by itself. c. Compute the Office Products Division's residual income for next year assuming that it performs the same as this year and adds the new product line. w Show less 1 Residus income for this year 2 Residual income for the new product line by itself Residual income for next year ( Reqs Reg D > Req 1 to 3 Reg 4 Req5 Rey 6A to 6C Rag 6D Using the residual income approach. if you were in Dell Havasi's position, would you accept or reject the new product line? Accept Reject