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?
3. Why do you suppose headquarters is anxious for the OfficeProducts Division to add the new product line?
2. If you were in Dell Havasiâs position, would you accept orreject 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 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 $ 21,750,000 Variableexpenses 13,731,600 Contributionmargin 8,018,400 Fixed expenses 6,025,000 Net operatingincome $ 1,993,400 Divisional operatingassets $ 4,338,800
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:
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. |