Question

“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 the most recent year are given below:

Sales	$	21,100,000
Variable expenses		13,350,400
Contribution margin		7,749,600
Fixed expenses		5,935,000
Net operating income	$	1,814,600
Divisional operating assets	$	4,220,000

The company had an overall return on investment (ROI) of 18.00% 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 $2,262,500. The cost and revenue characteristics of the new product line per year would be:

Sales	$ 9,050,000
Variable expenses	65% of sales
Fixed expenses	$2,534,000

Required:  

1. Compute the Office Products Division’s ROI for the most recent year; also compute the ROI as it would appear if the new product line is added. (Round the "Margin", "Turnover" and "ROI" answers to 2 decimal places.)

	Present New Line Total Sales Net operating income Operating assets Margin % % % Turnover times times times ROI % % %

4. Suppose that the company’s minimum required rate of return on operating assets is 16.00% and that performance is evaluated using residual income.

a. Compute the Office Products Division’s residual income for the most recent year; also compute the residual income as it would appear if the new product line is added.

	Present New Line Total Operating assets Minimum required return % % % Minimum net operating income Actual net operating income Minimum net operating income Residual income $0 $0 $0

Answer 1