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 $ 22,100,000 13,893,400 8,206,600 6,085,800 $ 2,121, 6ee $ 5,200, eee The company had an overall return on investment (ROI) of 16.00% 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 $2,387,500. The cost and revenue characteristics of the new product line per year would be:

good evening. can you please answer these for me please. thanks and have a great day

Answer 1

Net product line net operating income = 9550000*(1-65%)-2578500= $764000
Margin = Net operating income/Sales
Turnover = Sales/Operating assets
ROI = Margin*Turnover
	Present	New line	Total
Sales	22100000	9550000	31650000
Net operating income	2121600	764000	2885600
Operating assets	5200000	2387500	7587500
Margin	9.60%	8.00%	9.12%
Turnover	4.25	4.00	4.17
ROI	40.80%	32.00%	38.03%
1
ROI for this year = 40.80%
2
ROI for the new product line by itself = 32.00%
3
ROI for next year = 38.03%
4
Reject, as ROI decreases
5
Adding the new product line would increase company's overall ROI
6
	Present	New line	Total
Operating assets	5200000	2387500	7587500
X Minimum required return	12%	12%	12%
Minimum Net operating income	624000	286500	910500
Actual Net operating income	2121600	764000	2885600
Less: Minimum Net operating income	624000	286500	910500
Residual income	1497600	477500	1975100
a
Residual income for this year = 1497600
b
Residual income for new product line = 477500
c
Residual income for next year = 1975100
d
Accept, as residual income increases