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PROBLEM 11-21 Return on Investment (ROI) and Residual Income LO11-1, LO11-2 "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 divi- sions 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 . $10,000,000 Variable expenses 6,000,000 Contribution margin 4,000,000 Fixed expenses . 3,200,000 Net operating income $. 800,000 ... Divisional average operating assets $4,000,000

PROBLEM 11-21 Return on Investment (ROI) and Residual Income LO11-1, LO11-2 "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 divi- sions 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 . $10,000,000 Variable expenses 6,000,000 Contribution margin 4,000,000 Fixed expenses . 3,200,000 Net operating income $. 800,000 ... Divisional average operating assets $4,000,000

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter16: Cost-volume-profit Analysis
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PROBLEM 11-21 Return on Investment (ROI) and Residual Income LO11-1, LO11-2 "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 divi- sions 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 $10,000,000 Variable expenses 6,000,000 Contribution margin 4,000,000 Fixed expenses 3,200,000 $. 800,000 Net operating income Divisional average operating assets $4,000,000
Transcribed Image Text:PROBLEM 11-21 Return on Investment (ROI) and Residual Income LO11-1, LO11-2 "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 divi- sions 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 $10,000,000 Variable expenses 6,000,000 Contribution margin 4,000,000 Fixed expenses 3,200,000 $. 800,000 Net operating income 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 line that would require an additional investment that would increase average operating assets by $1,000,000. The cost and revenue characteristics of the new product line per year would be: Sales $2,000,000 Variable expenses 60% of sales Fixed expenses $640,000 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. 4. If you were in Dell Havasi's position, would you accept or reject the new product line? Explain. 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 12% and that performance is evaluated using residual income. Compute the Office Products Division's residual income for this Compute the Office Products Division's residual income for the new product line by itself. 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. Using the residual income approach, if you were in Dell Havasi's position, would you accept or reject the new product line? Explain. year. a. b. с. d.
Transcribed Image Text: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 line that would require an additional investment that would increase average operating assets by $1,000,000. The cost and revenue characteristics of the new product line per year would be: Sales $2,000,000 Variable expenses 60% of sales Fixed expenses $640,000 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. 4. If you were in Dell Havasi's position, would you accept or reject the new product line? Explain. 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 12% and that performance is evaluated using residual income. Compute the Office Products Division's residual income for this Compute the Office Products Division's residual income for the new product line by itself. 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. Using the residual income approach, if you were in Dell Havasi's position, would you accept or reject the new product line? Explain. year. a. b. с. d.
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