The company had an overall return on investment (ROI) of 17.00% 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 $2,326,200. The cost and revenue characteristics of the new product line per year would be:
The company had an overall return on investment (ROI) of 17.00% 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 $2,326,200. The cost and revenue characteristics of the new product line per year would be:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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See questions 6A-6C in image
Question 6D: Using the residual income approach, if you were in Dell Havasi’s position, would you accept or reject the new product line?
Transcribed Image Text:"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:** $21,600,000
- **Variable expenses:** $13,622,600
- **Contribution margin:** $7,977,400
- **Fixed expenses:** $6,010,000
- **Net operating income:** $1,967,400
- **Divisional average operating assets:** $4,499,200
The company had an overall return on investment (ROI) of 17.00% 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 $2,326,200. The cost and revenue characteristics of the new product line per year would be:
- **Sales:** $9,300,000
- **Variable expenses:** 65% of sales
- **Fixed expenses:** $2,557,400
---
This information outlines Dell Havasi's cautious approach in maintaining the ROI success of the Office Products Division, especially in the light of potential new investments and changes in the company’s operational strategy.
![## Instructions for Residual Income Calculation
Complete this question by entering your answers in the tabs below.
### Tabs for Requirement:
- **Req 1 to 3**
- **Req 4**
- **Req 5**
- **Req 6A to 6C**
- **Req 6D**
---
### Residual Income Calculation Instructions:
6. Suppose that the company's minimum required rate of return on operating assets 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 adds the new product line.
---
### Input Fields for Answers:
1. **Residual income for this year**
- [Input Field]
2. **Residual income for the new product line by itself**
- [Input Field]
3. **Residual income for next year**
- [Input Field]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa1fb77d1-c752-4653-8f65-d5ebd4ec27ec%2F3a3bf771-655c-48cc-9c50-b1c7749f229c%2Fd1hd72u_processed.png&w=3840&q=75)
Transcribed Image Text:## Instructions for Residual Income Calculation
Complete this question by entering your answers in the tabs below.
### Tabs for Requirement:
- **Req 1 to 3**
- **Req 4**
- **Req 5**
- **Req 6A to 6C**
- **Req 6D**
---
### Residual Income Calculation Instructions:
6. Suppose that the company's minimum required rate of return on operating assets 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 adds the new product line.
---
### Input Fields for Answers:
1. **Residual income for this year**
- [Input Field]
2. **Residual income for the new product line by itself**
- [Input Field]
3. **Residual income for next year**
- [Input Field]
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