Problem 11-18 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] \"
ID: 2533410 • Letter: P
Question
Problem 11-18 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] "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 (ROl) 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: Sales Variable expenses Contribution margin Fixed expenses Net operating income Divisional average operating assets $ 22,440,000 14,094, 600 8,345,400 6,130,000 $ 2,215,400 $4,480,000 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 $2,430,600. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $9,705, 000 65% of sales $2,591,710Explanation / Answer
Answer 1-3. Calculation of Net Opearting Income From New Product Line Sales 9,705,000 Less: Variable Cost - 65% 6,308,250 Contribution 3,396,750 Less: Fixed Costs 2,591,710 Net Operating Income 805,040 Calculation of ROI Present New Line Total Sales 22,440,000 9,705,000 32,145,000 Net Operating Income 2,215,400 805,040 3,020,440 Opearting Assets 4,480,000 2,430,600 6,910,600 Margin (Net Operating Income / Sales) 9.87% 8.30% 9.40% Turnover (Sales / Avg. Opearting assets) 5.01 3.99 4.65 ROI (Margin X Turnover) 49.45% 33.12% 43.71% Answer 6. Residual Income = Net Operating Income - Min. required Return Present New Line Total Operating Assets 4,480,000.00 2,430,600.00 6,910,600.00 Minimum Required Return 15% 15% 15% Minimum Net Operating Income 672,000.00 364,590.00 1,036,590.00 Actual Net Operating Income 2,215,400.00 805,040.00 3,020,440.00 Less: Minimum Requied Return - 15% 672,000.00 364,590.00 1,036,590.00 Residual income 1,543,400.00 440,450.00 1,983,850.00