M D E H 1 "I know headquarters wants us to add that new product line," said Dell Havasi manager of Billings Company's Office Prostat Division "But I want to see the numbers before I make any move. Our division's return on investment (ROD) has led the company for three years, and I don't want 2 any letdown 3 4 Billings Company is a decentralized wholesale with five stonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROL Operating results for the company's Office Products Division for this year we s given below 6 7 Sales $ 22,000,000 3 Variable expenses 14,000,000 9 Contribution margin 8,000,000 10 Fixed expenses 6,000,000 11 Net operating income 3 2,000,000 12 Divisional average operating at $ 4,000,000 Divisional average non-operating nets 12 $ 2,000,000 14 15 The company had overall return on investment (ROI) of 17.00% this 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 by $2,755,000 16 The cost and revenue characteristics of the new product line per year would be 12 10 Sales 59,000,000 19 Variable expenses 65% of sales 20 ed express 52,500,000 21 22 23 Required: 24 1. Composite the Office Products Division"ROL for this year 20 27 28 2.mps the orice Produs Divin' Rol for the potential new product line by itself Compare the ome Product Division's combined ROI for next yemingth perform themes the year and otherwis 30 3 Paste BIU y a. Av IMI I $ % 988 Format as Table Cell Styles x A B C D E F G H 23. Compute the Office Products Division's combined ROI for next year assuming that it performs the same as this year and adds the new product line. -3 14 55 86 37 4. If you were in Dell Havasi's position, would you accept or reject the new product line? 38 39 40 41 5. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line? 42 43 44 45 6. Suppose that the company's minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income 47 Compute the Office Products Division's residual income for this year 50 51 h Compute the Office Products Division's residual income for the potential new product line by itself 53 54 55 Compute the orice Products Division's residual income for next year suming that it performs the same as this year and adds the new product line 57 5 59 4. Using the residual income approach, if you were in Dell Havasi's position, would you accept or reject the new product line! 60 61 02 63 64