Question

"I know headquarters wants us to add on 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 has led the company for three years, and I don't want any letdown." Billings Company is a decentralized organization with five autonomous divisions. The divisions are evaluated on the basis of the return that they are able to generate on invested assets, with year-end bonuses given to the divisional managers who have the highest ROI figures. Operating results for the company's office products division for the most recent year are as follows: Sales Less: Variable expenses $180,000,000 117,000,000 Contribution margin Less: Fixed expenses 63,000,000 50,400,000 Net operating income $ 12,600,000 Divisional operating assets $ 72,000,000 The company had an overall ROI of 13.5% last year (considering all divisions). The office products division has an opportunity to add a new product line that would require an additional investment in operating assets of $18,000,000. The cost and revenue characteristics of the new product line per year would be as follows: Sales Variable expenses Fixed expenses $36,000,000 65% of sales $10,080,000 Required: 1. Compute the office products division's ROI for the most recent year; also compute the ROI if the new product line were added. (Do not round intermediate calculations. Round "Percentage" answers to 2 decimal places, i.e., 0.1234 should be considered as 12.34%).) Present New Line Total ROI % % %

Answer 1

income on new line
contribution					12,600,000
less Fixed expense					-10,080,000
Net operating income					2520000
1,2&3)				present	new line	total
	Sales			180,000,000	36,000,000	216,000,000
	Net operating income			12,600,000	2,520,000	15,120,000
	operating assets			72,000,000	18,000,000	90,000,000
	margin			7.00%	7.00%	7.00%
	turnover			2.50	2.00	2.40
	ROI			17.50%	14.00%	16.80%
	where margin = net operating income/sales
	turnover = sale/average operating assets
	ROI = margin *turnover
4)	Reject
5)	Addint the new product line would improve overall ROI
6)	Residual income = net operating income -(average assets *min rate or return)
				present	new line	total
	operating assets			72,000,000	18,000,000	90,000,000
	minimum required return			13%	13%	13%
	min net opeerating income			9360000	2340000	11700000
	actual net operating income			12,600,000	2,520,000	15,120,000
	min net operating income			9360000	2340000	11700000
	residual income			3,240,000	180,000	3,420,000
b)	Accept