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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: $10,000,000
Variable expenses: $6,000,000
Contribution margin: $4,000,000
Fixed expenses: $3,200,000
Net operating income: $800,000
Divisional average operating assets: $4,000,000
The company had an overall return on investment (ROI) of 15.00% last 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 $1,000,000. The cost and revenue characteristics of the new product line per year would be:
Sales: $2,000,000
Variable expenses: 60% of sales
Fixed expenses: $640,000
a. Compute the Office Products Division's ROI for this year.
b. Compute the Office Products Division's ROI for the new product line by itself.
c. Compute the Office Products Division's ROI for next year assuming that it performs the same as this year and adds the new product line.
d. If you were in Dell Havasi's position, would you accept or reject the new product line? Explain.
e. Compute the Residual Income this year and with the new investment.

Respuesta :

anthougo

a. The computation of the Office Products Division's ROI for this year is as follows:

= Net income/Operating Assets x 100

= $800,000/$4,000,000 x 100

= 20%

b. The computation of the Office Products Division's ROI for the new product line is as follows:

= Net income/Operating Assets x 100

= $160,000/$1,000,000 x 100

= 16%

c. The computation of the Office Products Division's ROI for next year is as follows:

= Net income/Operating Assets x 100

= $960,000/$5,000,000 x 100

= 19.2%

d. The tendency is to reject the new product line for the next year.  However, the reduction in the ROI is about 0.8%, which is not too much unless the only focus is achieving the short-term highest ROI.

e. The computation of the Residual Income this year is as follows:

Net income =           $800,000

ROI =                        $600,000 ($4,000,000 x 15%)

Residual income = $200,000 ($800,000 - $600,000)

The computation of the Residual Income with the new investment is as follows:

Net income =          $160,000

ROI =                       $150,000 ($1,000,000 x 15%)

Residual income =  $10,000 ($160,000 - $150,000)

Data and Calculations:

Sales = $10,000,000

Variable expenses = $6,000,000

Contribution margin = $4,000,000

Fixed expenses = $3,200,000

Net operating income = $800,000

Divisional average operating assets = $4,000,000

Additional investment

Sales = $2,000,000

Variable Expenses = $1,200,000 ($2,000,000 x 60%)

Contribution margin = $800,000 ($2,000,000 - $1,200,000)

Fixed expenses = $640,000

Net operating income = $160,000 ($800,000 - $640,000)

Operating assets for the new product line = $1,000,000

Learn more: https://brainly.com/question/14080659

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