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Problem 11-18 Return on investment (RO) and Residual Income [L011-1, L011-2] I know headquarters wants us to add that new product line, said Dell Havasi,
Problem 11-18 Return on investment (RO) and Residual Income [L011-1, L011-2] "I know headquarters wants us to add that new product line," said Dell Havasi, manager of Billings Company's Office Products Division. "But Iwant to see the numbers before I make any move. Our division's return on investment (ROI) has led the company for three years, and l 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 Office Products Division for the most recent year are given below: Sales 22,235,000 13,981,800 Variable expenses Contribution margin 8,253,200 6,100,000 Fixed expenses Net operating income 2,153,200 Divisional operating assets 4,625,000 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 $2,400,000. The cost and revenue characteristics of the new product line per year would be: $9,600,000 Variable expenses 65% of sales $2,582,400 Fixed expenses
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