"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, withyear-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the company's Office ProductsDivision for this year are given below:SalesVariable expensesContribution marginFixed expensesNet operating incomeDivisional average operating assetsThe company had an overall return on investment (ROI) of 18.00% this year (considering all divisions). Next year the Office ProductsDivision has an opportunity to add a new product line that would require an additional investment that would increase averageoperating assets by $2,430,600. The cost and revenue characteristics of the new product line per year would be:SalesVariable expensesFixed expenses$ 22,440,00014,094,6008,345,4006,130,000$2,215,400$4,480,000$ 9,705,00065% of sales$ 2,591,710Required:1. Compute the Office Products Division's margin, turnover, and ROI for this year.2. Compute the Office Products Division's margin, turnover, and ROI for the new product line by itself.3. Compute the Office Products Division's margin, turnover, and ROI for next year assuming that it performs the same as this year andadds the new product line.4. If you were in Dell Havasi's position, would you accept or reject the new product line?5. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?6. Suppose that the company's minimum required rate of return on operating assets is 15% and that performance is evaluated usingresidual 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 and adds thenew product line.d. Using the residual income approach, if you were in Dell Havasi's position, would you accept or reject the new product line?

Hi studentSince there are multiple subparts asked, we will answer only first three…

"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 Variable expenses Contribution margin Fixed expenses Net operating income Divisional average operating assets Sales Variable expenses Fixed expenses $ 22,440,000 14,094,600 8,345,400 6,130,000 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: $ 9,705,000 65% of sales $ 2,591,710 $2,215,400 $4,480,000 Required: 1. Compute the Office Products Division's margin, turnover, and ROI for this year. 2. Compute the Office Products Division's margin, turnover, and ROI for the new product line by itself. 3. Compute the Office Products Division's margin, turnover, and ROI for next year assuming that it performs the same as this year and adds the new product line.

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q