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 adecentralized wholesaler with five autonomous divisions. Thedivisions are evaluated on the basis of ROI, with year-end bonusesgiven to the divisional managers who have the highest ROIs.Operating results for the companyâs Office Products Division forthe most recent year are given below:
Sales $ 21,600,000 Variableexpenses 13,622,600 Contributionmargin 7,977,400 Fixed expenses 6,010,000 Net operatingincome $ 1,967,400 Divisional operatingassets $ 4,499,200
The company had an overall returnon investment (ROI) of 17.00% last year (considering alldivisions). The Office Products Division has an opportunity to adda new product line that would require an additional investment inoperating assets of $2,326,200. The cost and revenuecharacteristics of the new product line per year would be:
Sales $9,300,000 Variableexpenses 65% ofsales Fixed expenses $2,557,400
Required: 1. Compute the Office Products Divisionâs ROI for the most recentyear; also compute the ROI as it would appear if the new productline is added. (Round the "Margin", "Turnover" and "ROI"answers to 2 decimal places.)
Present New Line Total Sales NOI Op Assets Margin Turnover ROI
2. If you were in Dell Havasiâs position, would you accept orreject the new product line?
Accept Reject
3. Why do you suppose headquarters is anxious for the OfficeProducts Division to add the new product line?
Adding the new line would Increasethe company's overall ROI. Adding the new line would Decreasethe company's overall ROI.
4. Suppose that the companyâs minimum required rate of return onoperating assets is 14.00% and that performance is evaluated usingresidual income.
a. Compute the Office Products Divisionâs residual income for themost recent year; also compute the residual income as it wouldappear if the new product line is added.
Present New Line Total Op. Assets Min req return Min NOI Actual NOI Minimum NOI Residual Income
b. Under these circumstances, if you were in Dell Havasiâsposition, would you accept or reject the new product line?
Accept Reject
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 adecentralized wholesaler with five autonomous divisions. Thedivisions are evaluated on the basis of ROI, with year-end bonusesgiven to the divisional managers who have the highest ROIs.Operating results for the companyâs Office Products Division forthe most recent year are given below: |
Sales | $ | 21,600,000 |
Variableexpenses | 13,622,600 | |
Contributionmargin | 7,977,400 | |
Fixed expenses | 6,010,000 | |
Net operatingincome | $ | 1,967,400 |
Divisional operatingassets | $ | 4,499,200 |
The company had an overall returnon investment (ROI) of 17.00% last year (considering alldivisions). The Office Products Division has an opportunity to adda new product line that would require an additional investment inoperating assets of $2,326,200. The cost and revenuecharacteristics of the new product line per year would be: |
Sales | $9,300,000 |
Variableexpenses | 65% ofsales |
Fixed expenses | $2,557,400 |
Required: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1. | Compute the Office Products Divisionâs ROI for the most recentyear; also compute the ROI as it would appear if the new productline is added. (Round the "Margin", "Turnover" and "ROI"answers to 2 decimal places.)
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