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	$	21,902,000
Variable expenses		13,788,600
Contribution margin		8,113,400
Fixed expenses		6,055,000
Net operating income	$	2,058,400
Divisional operating assets	$	4,562,500
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 $2,250,500. The cost and revenue characteristics of the new product line per year would be:   Sales $ 9,450,000   Variable expenses 65% of sales   Fixed expenses $ 2,570,200 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. (Do not round intermediate calculations. Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) Present New Line Total Sales Net operating income Operating assets Margin % % % Turnover ROI % % %

2.	If you were in Dell Havasi’s position, would you accept or reject the new product line?
	Accept Reject 3. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line? Adding the new line would Increase the company's overall ROI. Adding the new line would Decrease the company's overall ROI. 4. Suppose that the company’s minimum required rate of return on operating assets is 14.00% 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. (Enter your Minimum Required Rate as a whole percentage (i.e., 0.12 should be entered as 12).) Present New Line Total Operating assets Minimum required return % % % Minimum net operating income Actual net operating income Minimum net operating income Residual income

b.	Under these circumstances, if you were in Dell Havasi’s position, would you accept or reject the new product line?
	Accept Reject

Answer 1

ans 1	Present	New Line	Total
Sales S	$21,902,000	9450000	$31,352,000
Net operating income N	2058400	737300	$2,795,700
Operating assets O	4562500	2250500	$6,813,000
Margin M=N/S*100	9.40	7.80	8.92	%
Turnover T= S/O	4.80	4.20	4.60
ROI M*T	45.12	32.76	41.03	%
working	New Line
Sales	9450000
Variable expenses	6142500
Fixed expenses	2570200
Net operating income N	737300
ans 2
Reject as new line ROI is lower than present situation
ANS 3
Adding the new line would Decrease the company's overall ROI.
ans 4]	Present	New Line	Total
Operating assets	4562500	2250500	6813000
Minimum required return	14%	14%	14%	%
Minimum net operating income	638750	315070	953820
Actual net operating income	2058400	737300	2795700
Minimum net operating income	638750	315070	953820
Residual income	1419650	422230	1841880
b) accept as positive residual income