I know headquarters wants us to add that new product line, said Dell Havasi, man
ID: 2561010 • 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 (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 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 Sales Variable expenses Contribution margin Pixed expenses Net operating income Divisional average operating assets 22, 700, 000 4.363,700 8,336,300 6.175,000 2,161,300 5,675,000 The company had an overall return on investment (ROI) of 16.00% 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 $3,938,000. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses 9,800,000 658 of sales $2,582,900Explanation / Answer
income on new line contribution (9,800,000*35%)= 3430000 less Fixed expense -2,582,900 Net operating income 847100 1,2&3) present new line total Sales 22,700,000 9,800,000 32,500,000 Net operating income 2,161,300 847,100 3,008,400 operating assets 5,675,000 3,938,000 9,613,000 margin 9.52% 8.64% 9.26% turnover 4.00 2.49 3.38 ROI 38.08% 21.51% 31.30% 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 5,675,000 3,938,000 9,613,000 minimum required return 13% 13% 13% min net opeerating income 737750 511940 1249690 actual net operating income 2,161,300 847,100 3,008,400 min net operating income 737750 511940 1249690 residual income 1,423,550 335,160 1,758,710 b) Accept