Question

“I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...

“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 ROIs. Operating results for the company’s Office Products Division for this year are given below:

Sales $ 21,902,000
Variable expenses 13,788,600
Contribution margin 8,113,400
Fixed expenses 6,055,000
Net operating income $ 2,058,400
Divisional average operating assets $ 4,562,500

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 $2,250,500. The cost and revenue characteristics of the new product line per year would be:

Sales $9,450,000
Variable expenses 65% of sales
Fixed expenses $2,570,200

Required:

1. Compute the Office Products Division’s ROI for this year.

2. Compute the Office Products Division’s ROI for the new product line by itself.

3. Compute the Office Products Division’s 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 Havasi’s 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 company’s minimum required rate of return on operating assets is 14% and that performance is evaluated using residual income.

a. Compute the Office Products Division’s residual income for this year.

b. Compute the Office Products Division’s residual income for the new product line by itself.

c. Compute the Office Products Division’s 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 Havasi’s position, would you accept or reject the new product line?

0 0
Add a comment Improve this question Transcribed image text
Answer #1
Net product line net operating income = 9450000*(1-65%)-2570200= $737300
Margin = Net operating income/Sales
Turnover = Sales/Operating assets
ROI = Margin*Turnover
Present New line Total
Sales 21902000 9450000 31352000
Net operating income 2058400 737300 2795700
Operating assets 4562500 2250500 6813000
Margin 9.40% 7.80% 8.92%
Turnover 4.80 4.20 4.60
ROI 45.12% 32.76% 41.03%
1
ROI for this year = 45.12%
2
ROI for new product line by itself = 32.76%
3
ROI for next year = 41.03%
4
Reject, as ROI decreases
5
Adding the new product line would increase company's overall ROI
6
Present New line Total
Operating assets 4562500 2250500 6813000
Minimum required return 14% 14% 14%
Minimum Net operating income 638750 315070 953820
Actual Net operating income 2058400 737300 2795700
Minimum Net operating income 638750 315070 953820
Residual income 1419650 422230 1841880
a
Residual income for this year = 1419650
b
Residual income for new product line = 422230
c
Residual income for next year = 1841880
d
Accept, as residual income increases
Add a comment
Know the answer?
Add Answer to:
“I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • “I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...

    “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...

  • “I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...

    “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...

  • “I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...

    “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...

  • “I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...

    “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...

  • “I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...

    “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...

  • I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...

    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...

  • “I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...

    “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...

  • “I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...

    “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...

  • “I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...

    “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...

  • “I know headquarters wants us to add that new product line,” said Dell Havasi, manager of...

    “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...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT