Question

"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 $ 22,440,000 14,094,600 8, 345, 400 6,130,000 $ 2,215,400 $ 4,480,000 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 $2,430,600. The cost and revenue characteristics of the new product line per year would be: Sales Variable expenses Fixed expenses $9, 705,000 65% of sales $2,591,710 Required: 1. Compute the Office Products Division's ROI for this year.

Please help with the requirements above. Thank you!

Answer 1

Net product line net operating income = 9705000*(1-65%)-2591710= $805040
Margin = Net operating income/Sales
Turnover = Sales/Operating assets
ROI = Margin*Turnover
	Present	New line	Total
Sales	22440000	9705000	32145000
Net operating income	2215400	805040	3020440
Operating assets	4480000	2430600	6910600
Margin	9.87%	8.30%	9.40%
Turnover	5.01	3.99	4.65
ROI	49.45%	33.12%	43.71%
1
ROI for this year = 49.45%
2
ROI for new product line by itself = 33.12%
3
ROI for next year = 43.71%
6
	Present	New line	Total
Operating assets	4480000	2430600	6910600
X Minimum required return	15%	15%	15%
Minimum Net operating income	672000	364590	1036590
Actual Net operating income	2215400	805040	3020440
Less: Minimum Net operating income	672000	364590	1036590
Residual income	1543400	440450	1983850
1
Residual income for this year = 1543400
2
Residual income for new product line = 440450
3
Residual income for next year = 1983850