“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 $ 22,440,000 Variable expenses 14,094,600 Contribution margin 8,345,400 Fixed expenses 6,130,000 Net operating income $ 2,215,400 Divisional average operating assets $ 4,480,000 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 requiring $2,430,600 of additional average operating assets. The annual cost and revenue estimates for the new product would be: Sales $ 9,705,000 Variable expenses 65 % of sales Fixed expenses $ 2,591,710 Required: Compute the Office Products Division’s margin, turnover, and ROI for this year. Compute the Office Products Division’s margin, turnover, and ROI for the new product by itself. Compute the Office Products Division’s margin, turnover, and ROI for next year assuming it performs the same as this year and adds the new product. If you were in Dell Havasi’s position, would you accept or reject the new product? Why do you suppose headquarters is anxious for the Office Products Division to add the new product? Suppose the company’s minimum required rate of return on operating assets is 15% and performance is evaluated using residual income. Compute the Office Products Division’s residual income for this year. Compute the Office Products Division’s residual income for the new product by itself. Compute the Office Products Division’s residual income for next year assuming it performs the same as this year and adds the new product. Using the residual income approach, if you were in Dell Havasi’s position, would you accept or reject the new product? 6. Suppose the company’s minimum required rate of return on operating assets is 15% and 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 by itself. c. Compute the Office Products Division’s residual income for next year assuming it performs the same as this year and adds the new product. Show less 1. Residual income for this year $1,543,400 2. Residual income for the new product line by itself ? 3. Residual income for next year ?
“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
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 | $ 22,440,000 |
|---|---|
| Variable expenses | 14,094,600 |
| Contribution margin | 8,345,400 |
| Fixed expenses | 6,130,000 |
| Net operating income | $ 2,215,400 |
| Divisional average operating assets | $ 4,480,000 |
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 requiring $2,430,600 of additional average operating assets. The annual cost and revenue estimates for the new product would be:
| Sales | $ 9,705,000 | |
|---|---|---|
| Variable expenses | 65 | % of sales |
| Fixed expenses | $ 2,591,710 |
Required:
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Compute the Office Products Division’s margin, turnover, and ROI for this year.
-
Compute the Office Products Division’s margin, turnover, and ROI for the new product by itself.
-
Compute the Office Products Division’s margin, turnover, and ROI for next year assuming it performs the same as this year and adds the new product.
-
If you were in Dell Havasi’s position, would you accept or reject the new product?
-
Why do you suppose headquarters is anxious for the Office Products Division to add the new product?
-
Suppose the company’s minimum required
rate of return on operating assets is 15% and performance is evaluated using residual income.-
Compute the Office Products Division’s residual income for this year.
-
Compute the Office Products Division’s residual income for the new product by itself.
-
Compute the Office Products Division’s residual income for next year assuming it performs the same as this year and adds the new product.
-
Using the residual income approach, if you were in Dell Havasi’s position, would you accept or reject the new product?
-
6. Suppose the company’s minimum required rate of return on operating assets is 15% and 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 by itself.
c. Compute the Office Products Division’s residual income for next year assuming it performs the same as this year and adds the new product.
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