Problem 11-21 Requirements 1., 2., and 3.: (1) Sales (2) Net operating income... (3) Operating assets. (4) Margin (2) ÷ (1) ..... ...... (5) Turnover (1) ÷ (3)...) (6) ROI (4) x (5) * This Year New Line Next Year $2,000,0 Sales... 00 Variable expenses ( _ % x $ 1,200,00 0 Contribution margin 800,000 640,00 Fixed expenses... 0 $ 160,00 Net operating income.... 0 4. 5. 6a. through 6c.: This Year New Line Next Year Operating assets Minimum return required. ✗ % ✗ % ✗ % Minimum required return ... Actual net operating income Minimum required return (above) Residual income.. "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 a decision. 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 using 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 $10,000,000 6,000,000 4,000,000 3,200,000 $ 800,000 Divisional average operating assets $ 4,000,000 The company had an overall return on investment (ROI) of 15% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product requiring $1,000,000 of additional average operating assets. The annual cost and revenue estimates for the new product would be: Sales $2,000,000 Fixed expenses Variable expenses 60% of sales $640,000 Page 528

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter18: Pricing And Profitability Analysis

Section: Chapter Questions

Problem 36P: Dantrell Palmer has just been appointed manager of Kirchner Glass Products Division. He has two...

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Related questions

Question

100%

Required:

Compute the Office Products Division’s ROI for this year.
Compute the Office Products Division’s ROI for the new product line by itself.
Compute the Office Products Division’s ROI for next year assuming that it performs the same as this year and adds the new product line.
If you were in Dell Havasi’s position, would you accept or reject the new product line? Explain.
Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?
Suppose that the company’s minimum required rate of return on operating assets is 12% 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 and adds the new 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? Explain.