Faced with headquarters’ desire to add a new product line, Stefan Grenier, manager of Bilti Products’ East Division, felt that he had to see the numbers before he made a move. His division’s ROI has led the company for three years, and he doesn’t want any letdown. |
Bilti Products is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the highest ROI. Operating results for the company’s East Division for last year are given below: |
Sales | $ | 23,100,000 | |
Variable expenses | 13,670,000 | ||
Contribution margin | 9,430,000 | ||
Fixed expenses | 7,582,000 | ||
Operating income | $ | 1,848,000 | |
Divisional operating assets | $ | 7,700,000 | |
The company had an overall ROI of 12% last year (considering all divisions). The new product line that headquarters wants Grenier’s East Division to add would require an investment of $4,950,000. The cost and revenue characteristics of the new product line per year would be as follows: |
Sales | $ | 9,900,000 | |
Variable expenses | 70% of sales | ||
Fixed expenses | $ | 2,277,000 | |
Required: |
1. |
Compute the East Division’s ROI for last year; also compute the ROI as it would appear if the new product line were added. (Do not round intermediate calculations. ) |
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2. | If you were in Grenier’s position, would you accept or reject the new product line? | ||||
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3. |
Why do you suppose headquarters is anxious for the East Division to add the new product line? |
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4. |
Suppose that the company’s minimum required rate of return on operating assets is 10% and that performance is evaluated using residual income. |
a. |
Compute East Division’s residual income for last year; also compute the residual income as it would appear if the new product line were added. |
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b. |
Under these circumstances, if you were in Grenier’s position, would you accept or reject the new product line? |
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Net product line net operating income = 9900000*(1-70%)-2277000= $693000 | |||
Margin = Net operating income/Sales | |||
Turnover = Sales/Operating assets | |||
ROI = Margin*Turnover | |||
1 | |||
Present | New line | Total | |
Sales | 23100000 | 9900000 | 33000000 |
Net operating income | 1848000 | 693000 | 2541000 |
Operating assets | 7700000 | 4950000 | 12650000 |
Margin | 8.00% | 7.00% | 7.70% |
Turnover | 3.00 | 2.00 | 2.61 |
ROI | 24.00% | 14.00% | 20.09% |
2 | |||
Reject, as ROI decreases | |||
3 | |||
Adding the new product line would increase company's overall ROI | |||
4a | |||
Present | New line | Total | |
Operating assets | 7700000 | 4950000 | 12650000 |
Minimum required return | 10% | 10% | 10% |
Minimum Net operating income | 770000 | 495000 | 1265000 |
Actual Net operating income | 1848000 | 693000 | 2541000 |
Minimum Net operating income | 770000 | 495000 | 1265000 |
Residual income | 1078000 | 198000 | 1276000 |
b | |||
Accept, as residual income increases |
Faced with headquarters’ desire to add a new product line, Stefan Grenier, manager of Bilti Products’...
Faced with headquarters’ desire to add a new product line, Stefan Grenier, manager of Bilti Products’ East Division, felt that he had to see the numbers before he made a move. His division’s ROI has led the company for three years, and he doesn’t want any letdown. Bilti Products is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the highest ROI. Operating results...
Faced with headquarters’ desire to add a new product line, Stefan Grenier, manager of Bilti Products’ East Division, felt that he had to see the numbers before he made a move. His division’s ROI has led the company for three years, and he doesn’t want any letdown. Bilti Products is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the highest ROI. Operating results...
Problem 11-20 Return on Investment and Residual Income (LO3, LO4) Faced with headquarters' desire to add a new product line, Stefan Grenier, manager of Bilti Products' East Division, felt that he had to see the numbers before he made a move. His division's ROI has led the company for three years, and he doesn't want any letdown. Bilti Products is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given...
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“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 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 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 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...