Question

Saved 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 (ROin 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 ROl, 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 Variable expenses Contribution margin Fixed expenses Net operating income Divisional average operating assets 22,300,000 13,999,600 8,300,400 6,115,000 $ 2,185,400 5,575,000 nt The company had an overall return on investment (ROI) of 17.00% 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 $3.857400. The cost and revenue characteristics of the new product line per year would be: $9,650,000 65% of sales $2, 583,608 Fixed expenses 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 prodd?t line? 6. Suppose that the company's minimum required rate of return on operating assets is 14% and that performance is evaluated using a. Compute the Office Products Division's residual income for this year. < Prev 13 of 17 ??? Next> i e n ee) w?Pa xn A ? @? here to search

Answer 1

Return on Investment (ROI) = Net Income/Total investment x 100

1.

Office Products Division’s ROI = ($ 2,185,400/$ 5,575,000) x 100 = 0.392 x 100 = 39.2 %

2.

Net income for new product line = sales – variable cost – fixed cost

                                                        = $ 9,650,000 – ($ 9,650,000 x 0.65) - $ 2,583,600

                                                        = $ 9,650,000 – $ 6272500 - $ 2,583,600

                                                        = $ 793,900

ROI for new product line itself = ($ 793,900/$ 3,857,400) x 100

                                                 = 0.205812 x 100 = 20.58 %

3.

Next year:

Net income = $ 2,185,400 + $ 793,900 = $ 2,979,300

Total investment = $ 5,575,000 + 3,857,400 = $ 9,432,400

ROI of Office Products Division along with new line = ($ 2,979,300 /$ 9,432,400) x 100

                                                                         = 0.315858 x 100 = 31.59 %

4.

Havasi should reject the proposal of new product line as it is decreasing the ROI of Office Product Division.

*****Answered first four questions.