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: $ 21,100,000 Sales Variable expenses Contribution margin Fixed expenses 13,350,400 7,749,600 5,935,000 $ 1,814,600 Net operating income $ 4,220,000 Divisional average operating assets 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 $2,262,500. The cost and revenue characteristics of the new product line per year would be: Sales $9,050,000 65 of sales Variable expenses Fixed expenses $2,534,000

Answer 1

Solution:

1)	Return on Investment (ROI for this year)
	Net Operating Income (A)	$1,814,600
	Average Invested/Operating Assets (B)	$4,220,000
	Return on Investment (A/B*100)	43.00%
2)	Return on Investment (ROI for the new product line by itself)
	Net Operating Income (A) (Refer Note below)	$633,500
	Average Invested/Operating Assets (B)	$2,262,500
	Return on Investment (A/B*100)	28.00%
	Note:
	Sales	$9,050,000
	Less: Variable Costs (65% of sales)	$5,882,500
	Less: Fixed Expenses	$2,534,000
	Net Operating Income	$633,500
3)	Return on Investment (ROI for next year including new product
	Net Operating Income (A) (Refer Note below)	$2,448,100
	Average Invested/Operating Assets (B)	$6,482,500
	Return on Investment (A/B*100)	37.76%
	Note:
	Net Operating Income this year	$1,814,600
	Plus: Net Operating Income from new product	$633,500
	Total Operating Income	$2,448,100
	Average Operating Assets this year	$4,220,000
	Plus: Operating Assets related to new product line	$2,262,500
	Total Average Operating Assets	$6,482,500

4)

Accept

New product line would be accepted because the ROI from new product line is higher than the overall ROI 18% of the company.

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