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:
|
|
|
|
|
Sales |
$ |
22,835,000 |
|
Variable expenses |
|
14,297,200 |
|
|
|
|
Contribution margin |
|
8,537,800 |
|
Fixed expenses |
|
6,190,000 |
|
|
|
| Net
operating income |
$ |
2,347,800 |
|
|
|
|
Divisional operating assets |
$ |
4,000,000 |
|
|
|
|
|
|
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 $2,755,000. The cost and revenue
characteristics of the new product line per year would be:
|
|
|
|
Sales |
$
9,915,000 |
|
Variable expenses |
65% of
sales |
|
Fixed expenses |
$
2,607,450 |
|
|
|
Required: |
| 1. |
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. (Do not round intermediate calculations.
Round your Turnover answers to 2 decimal places. Round your Margin
and ROI percentage answers to 2 decimal places (i.e., 0.1234 should
be entered as 12.34).)
|
|
|
| 2. |
If you were in Dell Havasi’s position, would you accept or
reject the new product line?
|
|
|
|
|
| 3. |
Why do you suppose headquarters is anxious for the Office
Products Division to add the new product line?
|
|
|
|
|
Adding the new line would Increase the company's overall
ROI. |
|
Adding the new line would Decrease the company's overall
ROI. |
|
| 4. |
Suppose that the company’s minimum required rate of return on
operating assets is 14.00% and that performance is evaluated using
residual income.
|
| a. |
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. (Enter your
Minimum Required Rate as a whole percentage (i.e., 0.12 should be
entered as 12).)
|
|
|
| b. |
Under these circumstances, if you were in Dell Havasi’s
position, would you accept or reject the new product line?
|
|
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