Problem 11-21 (Algo) Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] "I know headquarters wants us to add that new product line," said Dell Havasi, 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 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 this year are given below: Sales Variable expenses Contribution margin Fixed expenses Net operating income Divisional average operating assets $ 22,300,000 13,999,600 8,300,400 6,115,000 2,185,400 $ 5,575,000 The company had an overall return on investment (ROI) of 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 assets by $3,857,400. The cost and revenue characteristics of the new product line per year would be: Sales Variable expenses Fixed expenses $9,650,000 65% of sales $2,583,600 Required: 1. Compute the Office Products Division's margin, turnover, and ROI for this year. 2. Compute the Office Products Division's margin, turnover, and ROI for the new product line by itself. 3. Compute the Office Products Division's margin, turnover, and 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 Office Products Division to add the new product line? 6. Suppose that the company's minimum required rate of return on operating assets is 14% and that performance is evaluated using residual income. a. Compute the Office Products Division's residual income for this year. b. 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? Req 1 to 3 Reg 4 Reg 5 Reg 6A to 6C Req 6D 1. Compute the Office Products Division's margin, turnover, and ROI for this year. 2. Compute the Office Products Division's margin, turnover, and ROI for the new product line by itself. 3. Compute the Office Products Division's margin, turnover, and 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 less 1. ROI for this year 2. ROI for the new product line by itself 3. ROI for next year % Req 1 to 3 Reg 4 Reg 5 Req 6A to 6C Req 6D 6. Suppose that the company's minimum required rate of return on operating assets is 14% and that performance is evaluated using residual income. a. Compute the Office Products Division's residual income for this year. b. 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. Show less 1. Residual income for this year 2. Residual income for the new product line by itself 3. Residual income for next year Problem 11-24 (Algo) Return on Investment (ROI) Analysis [LO11-1] The contribution format income statement for Huerra Company for last year is given below: Total $ Sales Variable expenses Contribution margin Fixed expenses Net operating income Income taxes @ 40% Net income 992,000 595,200 396,800 318,800 78,000 31,200 Unit $ 49.60 29.76 19.84 15.94 3.90 1.56 $ 2.34 $ 46,800 The company had average operating assets of $499,000 during the year. Required: 1. Compute the company's margin, turnover, and return on investment (ROI) for the period. For each of the following questions, indicate whether the margin and turnover will increase, decrease, or remain unchanged as a result of the events described, and then compute the new ROI figure. Consider each question separately, starting in each case from the data used to compute the original ROI in (1) above. 2. Using Lean Production, the company is able to reduce the average level of inventory by $95,000. 3. The company achieves a cost savings of $15,000 per year by using less costly materials. 4. The company purchases machinery and equipment that increases average operating assets by $130,000. Sales remain unchanged. The new, more efficient equipment reduces production costs by $4,000 per year. 5. As a result of a more intense effort by sales people, sales are increased by 20%; operating assets remain unchanged. 6. At the beginning of the year, obsolete inventory carried on the books at a cost of $17,000 is scrapped and written off as a loss, thereby lowering net operating income. 7. At the beginning of the year, the company uses $177,000 of cash (received on accounts receivable) to repurchase some of its common stock Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 Required 7 Compute the company's margin, turnover, and return on investment (ROI) for the period. (Round your intermediate calculations and final answer to 2 decimal places.) % Margin Turnover ROI % Required 1 Required 2 > Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 Required 7 Using Lean Production, the company is able to reduce the average level of inventory by $95,000. (Round your intermediate calculations and final answer to 2 decimal places.) Effect Margin Turnover ROI % Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 Required 7 The company achieves a cost savings of $15,000 per year by using less costly materials. (Round your intermediate calculations and final answer to 2 decimal places.) Effect % Margin Turnover ROI % Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 Required 7 The company purchases machinery and equipment that increases average operating assets by $130,000. Sales remain unchanged. The new, more efficient equipment reduces production costs by $4,000 per year. (Do not round intermediate calculations and round your final answers to 2 decimal places.) Effect % Margin Turnover ROI % Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 Required 7 As a result of a more intense effort by sales people, sales are increased by 20%; operating assets remain unchanged. (Round your intermediate calculations and final answer to 2 decimal places.) Effect % Margin Turnover ROI % Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 Required 7 At the beginning of the year, obsolete inventory carried on the books at a cost of $17,000 is scrapped and written off as a loss, thereby lowering net operating income. (Round your intermediate calculations and final answer to 2 decimal places.) Effect % Margin Turnover ROI % Required 1 Required 2 Required 3 Required 4 Required 5 Required 6 Required 7 At the beginning of the year, the company uses $177,000 of cash (received on accounts receivable) to repurchase some of its common stock. (Round your intermediate calculations and final answer to 2 decimal places.) Effect % Margin Turnover ROI