Question

lknow 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 the most recent year are given below: 21,600,000 Sales 13,622,600 Variable expenses 7,977,400 6,010,000 Contribution margin Fixed expenses Net operating income Divisional operating assets $ $1,967,400 4,499,200 The company had an overall return on investment (ROI) of 17.00% last year (considering all divisions). The Office Products Division has an opportunity to add a new product line that would require an additional investment in operating assets of $2,326,200. The cost and revenue characteristics of the new product line per year would be: The company had an overall return on investment (ROI) of 17.00% last year (considering all divisions). The Office Products Division has an opportunity to add a new product line that would require an additional investment in operating assets of $2,326,200. The cost and revenue characteristics of the new product line per year would be: Sales Variable expenses Fixed expenses $9,300,000 65% of sales $2,557,400 Required: 1. Compute the Office Products Division's ROl for the most recent year; also compute the ROl as it would appear if the new product line is added. (Round the "Margin", "Turnover" and "ROI" answers to 2 decimal places.) Total New Line Present Sales Net operating income Operating assets Margin Turnover ROI 0 0 4. Suppose that the company's minimum required rate of return on operating assets is 14.00% and that performance is evaluated using residual income. a. Compute the Office Products Division's residual income for the most recent year; also compute the residual income as it would appear if the new product line is added. Total New Line Present Operating assets Minimum required return Minimum net operating income Actual net operating income Minimum net operating income Residual income 0 0 0

Answer 1

income on new line
contribution (11,140,000*35%)=					3,255,000
less Fixed expense					-2,557,400
Net operating income					697600
1,2&3)				present	new line	total
	Sales			21,600,000	9,300,000	30,900,000
	Net operating income			1,967,400	697,600	2,665,000
	operating assets			4,499,200	2,326,200	6,825,400
	margin			9.11%	7.50%	8.62%
	turnover			4.80	4.00	4.53
	ROI			43.73%	29.99%	39.05%
	where margin = net operating income/sales
	turnover = sale/average operating assets
	ROI = margin *turnover
4)	Reject
5)	Addint the new product line would improve overall ROI
6)	Residual income = net operating income -(average assets *min rate or return)
				present	new line	total
	operating assets			4,499,200	2,326,200	6,825,400
	minimum required return			14%	14%	14%
	min net opeerating income			629888	325668	955556
	actual net operating income			1,967,400	697,600	2,665,000
	min net operating income			629888	325668	955556
	residual income			1,337,512	371,932	1,709,444
b)	Accept