I know headquarters wants us to add that new product line,\" said Dell Havasi, m
ID: 2524523 • 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 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 the most recent year are given below: Sales Variable expenses $ 22,300,000 13,999,600 Contribution margin Fixed expenses 8,300,400 6,115,000 $ 2,185,400 $5,575,000 Net operating income Divisional operating assets 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 $3,857,400. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $ 9,650,000 65% of sales $ 2,583,600Explanation / Answer
Dear Student Thank you for using Chegg Please find below the answer Statementshowing Computations Paticulars Present New Line Total Sales 22,300,000.00 9,650,000.00 31,950,000.00 Net Operting Income 2,185,400.00 793,900.00 2,979,300.00 Margin = NOI/Sales 9.80% 8.23% 9.32% Divisional operating assets 5,575,000.00 3,857,400.00 9,432,400.00 Turnover = Sales /Operating Assets 4.00 2.50 3.39 ROI = NOI * Turnover 39.20% 20.58% 31.59% New Line Sales 9,650,000.00 Less Variable Expenses 6,272,500.00 Contribution Margin= Sales - VC 3,377,500.00 Fixed cost 2,583,600.00 Net operating income 793,900.00 Accept since ROI of new product line is 20.58% which is greater than 17% ie companys overall ROI 3) Adding the new line would increase the company's overall ROI 4) Present New Line Total Operating assets 5,575,000.00 3,857,400.00 9,432,400.00 Minimum required return 14% 14% 14% Minimum net operating income 780,500.00 540,036.00 1,320,536.00 Actual net operating income 2,185,400.00 793,900.00 2,979,300.00 Minimum net operating income 780,500.00 540,036.00 1,320,536.00 Residual Income 1,404,900.00 253,864.00 1,658,764.00 b) Accept since Residual Income is positive