âI know headquarters wants us to add that new product line,â said Dell Havasi, manager of Billings Companyâs Office Products Division. âBut I want to see the numbers before I make any move. Our divisionâs return on investment (ROI) has led the company for three years, and I donât want any letdown.â
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 ROIs. Operating results for the companyâs Office Products Division for the most recent year are given below:
Sales $ 22,045,000 Variable expenses 13,882,000 Contribution margin 8,163,000 Fixed expenses 6,070,000 Net operating income $ 2,093,000 Divisional operating assets $ 5,500,000
The company had an overall return on investment (ROI) of 16.00% 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 $2,501,500. The cost and revenue characteristics of the new product line per year would be:
Sales$ 9,500,000 Variable expenses65% of sales Fixed expenses$ 2,574,100
Required: 1. Compute the Office Products Divisionâs ROI for the most recent year; also compute the ROI as it would appear if the new product line is added. (Do not round intermediate calculations. Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)
Present New Line total
Sales
Net operating income
operating assets
margin % % %
turnover
roi % % %
2.
Suppose that the companyâs minimum required rate of return on operating assets is 14.00% and that performance is evaluated using residual income.
a. Compute the Office Products Divisionâs residual income for the most recent year; also compute the residual income as it would appear if the new product line is added.
Present New line Total
operating assets
minimium required return % % %
minimium net operating income
actual net operating income
minimium net operaing income
residual income $ $ $
| âI know headquarters wants us to add that new product line,â said Dell Havasi, manager of Billings Companyâs Office Products Division. âBut I want to see the numbers before I make any move. Our divisionâs return on investment (ROI) has led the company for three years, and I donât want any letdown.â |
| 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 ROIs. Operating results for the companyâs Office Products Division for the most recent year are given below:
The company had an overall return on investment (ROI) of 16.00% 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 $2,501,500. The cost and revenue characteristics of the new product line per year would be: Sales$ 9,500,000 Variable expenses65% of sales Fixed expenses$ 2,574,100
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Related questions
âI know headquarters wants us to add that new product line,â said Dell Havasi, manager of Billings Companyâs Office Products Division. âBut I want to see the numbers before I make any move. Our divisionâs return on investment (ROI) has led the company for three years, and I donât want any letdown.â
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 ROIs. Operating results for the companyâs Office 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 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 $2,484,500. 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 |
Required:
1. Compute the Office Products Divisionâs ROI for this year.
2. Compute the Office Products Divisionâs ROI for the new product line by itself.
3. Compute the Office Products Divisionâs 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 Havasiâs 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 companyâs minimum required rate of return on operating assets is 13% and that performance is evaluated using residual income.
a. Compute the Office Products Divisionâs residual income for this year.
b. Compute the Office Products Divisionâs residual income for the new product line by itself.
c. Compute the Office Products Divisionâs 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 Havasiâs position, would you accept or reject the new product line?
âI know headquarters wants us to add that new product line,âsaid Dell Havasi, manager of Billings Companyâs Office ProductsDivision. âBut I want to see the numbers before I make any move.Our divisionâs return on investment (ROI) has led the company forthree years, and I donât want any letdown.â
Billings Company is a decentralized wholesaler with fiveautonomous divisions. The divisions are evaluated on the basis ofROI, with year-end bonuses given to the divisional managers whohave the highest ROIs. Operating results for the companyâs OfficeProducts Division for this year are given below:
| Sales | $ | 22,235,000 |
| Variable expenses | 13,981,800 | |
| Contribution margin | 8,253,200 | |
| Fixed expenses | 6,100,000 | |
| Net operating income | $ | 2,153,200 |
| Divisional average operatingassets | $ | 4,625,000 |
The company had an overall return on investment (ROI) of 17.00%this year (considering all divisions). Next year the OfficeProducts Division has an opportunity to add a new product line thatwould require an additional investment that would increase averageoperating assets by $2,400,000. The cost and revenuecharacteristics of the new product line per year would be:
| Sales | $9,600,000 |
| Variable expenses | 65% ofsales |
| Fixed expenses | $2,582,400 |
Required:
1. Compute the Office Products Divisionâs ROI for this year.
2. Compute the Office Products Divisionâs ROI for the newproduct line by itself.
3. Compute the Office Products Divisionâs ROI for next yearassuming that it performs the same as this year and adds the newproduct line.
4. If you were in Dell Havasiâs position, would you accept orreject the new product line?
5. Why do you suppose headquarters is anxious for the OfficeProducts Division to add the new product line?
6. Suppose that the companyâs minimum required rate of return onoperating assets is 14% and that performance is evaluated usingresidual income.
a. Compute the Office Products Divisionâs residual income forthis year.
b. Compute the Office Products Divisionâs residual income forthe new product line by itself.
c. Compute the Office Products Divisionâs residual income fornext year assuming that it performs the same as this year and addsthe new product line.
d. Using the residual income approach, if you were in DellHavasiâs position, would you accept or reject the new productline?
