"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 this year are given below:- Sales: $21,100,000- Variable expenses: $13,350,400- Contribution margin: $7,749,600- Fixed expenses: $5,935,000- Net operating income: $1,814,600- Divisional average operating assets: $4,220,000The 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 $2,262,500. The cost and revenue characteristics of the new product line per year would be:- Sales: $9,050,000- Variable expenses: 65% of sales- Fixed expenses: $2,534,000 ### Instructional Exercise on Residual Income Calculation**Background:**Suppose that the company's minimum required rate of return on operating assets is 16%, and that performance is evaluated using residual income.**Tasks:**a. Compute the Office Products Division’s residual income for this year. b. Compute the Office Products Division’s residual income for the new product line by itself. c. Compute the Office Products Division’s residual income for next year assuming that it performs the same as this year and adds the new product line.**Data Collection:**1. *Residual income for this year*2. *Residual income for the new product line by itself*3. *Residual income for next year***Navigation:**- You can navigate through different parts of the exercise using the buttons labeled **Req 5** and **Req 6D**.This exercise is designed to help you think critically about how new product lines can impact a division's financial performance. Through this process, you'll better understand the strategic financial decision-making involved in managing company resources.

The calculation of residual income is as follows: Residual income = operating income - (minimum required return x operating assets) Paticulars Amount ($) a Net operating Income 1814600 b Investment in opertaing Assets 4220000 c. Required rate of return 16% d b x c 675200 e Residual Income (a- d) 1139400 Paticulars Amount ($) a Sales 9050000 Less: b Variable Expense 5882500 c. Fixed expense 2534000 d Net operating Income (a-b-c) 633500 e Investment in opertaing Assets 2262500 f Required rate of return 16% g e x f 362000 h Residual Income (d - g) 271500 Paticulars Amount ($) a Net operating Income 2448100 b Investment in opertaing Assets 6482500 c. Required rate of return 16% d b x c 1037200 e Residual Income (a- d) 1410900Residual income for Current year $ 11,39,400 Residual income of the New product line itself $ 2,71,500 Residual income for Next year $ 14,10,900

Business

Accounting

6. Suppose that the company's minimum required rate of return on operating assets is 16% and that performance is evaluated using residual income. a. Compute the Office Products Division's residual income for this year. b. Compute the Office Products Division's residual income for the new product line by itself. c. Compute the Office Products Division's residual income for next year assuming that it performs the same as this year adds the new product line.

6. Suppose that the company's minimum required rate of return on operating assets is 16% and that performance is evaluated using residual income. a. Compute the Office Products Division's residual income for this year. b. Compute the Office Products Division's residual income for the new product line by itself. c. Compute the Office Products Division's residual income for next year assuming that it performs the same as this year adds the new product line.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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