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?
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?
Related questions
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:
The company had an overall return on investment (ROI) of 18.00%last year (considering all divisions). The Office Products Divisionhas an opportunity to add a new product line that would require anadditional investment in operating assets of $2,126,350. The costand revenue characteristics of the new product line per year wouldbe: |
| Sales | $9,350,000 |
| Variableexpenses | 65% ofsales |
| Fixed expenses | $ 2,560,500 |
| 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. |
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.) |
| 2. | If you were in Dell Havasiâs position, would you accept orreject the new product line? | ||||
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| 3. | Why do you suppose headquarters is anxious for the OfficeProducts Division to add the new product line? | ||||
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| 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. |
| b. | Under these circumstances, if you were in Dell Havasiâsposition, would you accept or reject the new product line? | ||||
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