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 $ 21,100,000 13,350,400 7,749,680 5,935,80 $ 1,814,680 $ 4,220,080 The company had an overall return on investment (ROI) of 18.00% 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 $2.262.500. The cost and revenue characteristics of the new product line per year would be: Sales Variable expenses Fixed expenses $9,95e,eee 65% of sales $2,534,000 Requlred: 1. Compute the Office Products Division's margin, turnover, and ROI for this year. 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 16% 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? Complete this question by entering your answers in the tabs below. Reg 1 to 3 Reg 4 Reg 5 Reg 6A to 6C Reg 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 %6 1. ROI for this year 2. ROI for the new product line by itself 3. ROI for next year %6 %6 Reg 1 to 3 Reg 4 > Complete this question by entering your answers in the tabs below. Reg 1 to 3 Req 4 Reg 5 Reg 6A to 60 Reg 50 6. Suppose that the company's minimum required rate of return on operating assets is 15% 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 11-17 (Algo) Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] Financial data for Joel de Paris, Inc., for last year follow: Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash Accounts receivable Inventory Plant and equipment, net Investment in Buisson, S.A. Land (undeveloped) Total assets Liabilities and Stockholders' Equity Accounts payable Long-term debt Stockholders' equity Total liabilities and stockholders' equity $ 139,eae 339,000 562,690 888,888 405,000 248.000 $ 2,573,ese $ $ 137.000 486,800 489, ene 848, eee 432, eae 249,00 $ 2,641,800 $ 373,000 1,844, eee 1,156, ese $ 2,573,000 $ 332,800 1,844,00 1,265,00 $ 2,641, Bee Joel de Paris, Inc. Income Statement Sales Operating expenses Net operating income Interest and taxes: Interest expense $ 128, mee Tax expense 192, mee Net income $ 4,268,000 3,585, 120 682,880 320,000 362,880 $ The company paid dividends of $253.880 last year. The "Investment in Buisson, S.A.." on the balance sheet represents an investment in the stock of another company. The company's minimum required rate of return of 15%. Requlred: 1. Compute the company's average operating assets for last year. 2 Compute the company's margin, turnover, and return on investment (ROI) for last year. (Round "Margin", "Turnover" and "ROI" to 2 decimal places.) 3. What was the company's residual income last year? 1. Average operating assets Margin 2. 96 Turnover ROI 96 3. Residual income