I know headquarters wants us to add that new product line,” said Dell Havasi, ma
ID: 2460216 • Letter: I
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 ROIs. Operating results for the company’s Office Products Division for the most recent year are given below:
The company had an overall return on investment (ROI) of 18.00% 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 $2,250,500. The cost and revenue characteristics of the new product line per year would be:
$ 2,570,200
Compute the Office Products Division’s ROI for the most recent year; also compute the ROI as it would appear if the new product line is added. (Round the "Margin", "Turnover" and "ROI" answers to 2 decimal places.)
Present New Line total
Sales
Net operating income
operating assets
margin % % %
turnover
roi % % %
2.
Suppose that the company’s minimum required rate of return on operating assets is 14.00% and that performance is evaluated using residual income.
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.
Present New line Total
operating assets
minimium required return % % %
minimium net operating income
actual net operating income
minimium net operaing income
residual income $ $ $
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 ROIs. Operating results for the company’s Office Products Division for the most recent year are given below:
Explanation / Answer
solution :
Present
New line
Total
Sales
21902000
9450000
31352000
Net operating income
2058400
737300
2795700
operating assets
4562500
2250500
6813000
margin (net operating income/sales*x100)
9.40%
7.80%
8.92%
turnover (sales/operating asset *100)
480.04%
419.91%
460.18%
roi (net operating income/operating asset*x100)
45.12%
32.76%
41.03%
Present
New line
Total
operating assets
4562500
2250500
6813000
minimium required return
14%
14%
14%
minimium net operating income
638750
315070
953820
actual net operating income
2058400
737300
2795700
minimium net operaing income
638750
315070
953820
residual income
1419650
422230
1841880
Present
New line
Total
Sales
21902000
9450000
31352000
Net operating income
2058400
737300
2795700
operating assets
4562500
2250500
6813000
margin (net operating income/sales*x100)
9.40%
7.80%
8.92%
turnover (sales/operating asset *100)
480.04%
419.91%
460.18%
roi (net operating income/operating asset*x100)
45.12%
32.76%
41.03%
Present
New line
Total
operating assets
4562500
2250500
6813000
minimium required return
14%
14%
14%
minimium net operating income
638750
315070
953820
actual net operating income
2058400
737300
2795700
minimium net operaing income
638750
315070
953820
residual income
1419650
422230
1841880