Business, 14.06.2021 15:40, sreyasusanbinu
I know headquarters wants us to add that new product line," said Dell Havasi, manager of Billings Companyâs Office Products Division. "But I want to see the numbers before I make any move. Our divisionâs return on investment (ROI) has led the company for three years, and I donât 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 companyâs Office Products Division for this year are given below:
Sales $21,810,000
Variable expenses 13,741,200
Contribution margin 8,068,800
Fixed expenses 6,040,000
Net operating income $2,028,800
Divisional average operating assets $4,363,000
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 line that would require an additional investment that would increase average operating assets by $2,350,000. The cost and revenue characteristics of the new product line per year would be:
Sales $9,396,500
Variable expenses 65% of sales
Fixed expenses $2,564,875
Required:
a. Compute the Office Products Divisionâs ROI for this year.
b. Compute the Office Products Divisionâs ROI for the new product line by itself.
c. Compute the Office Products Divisionâs 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 Havasiâs position, would you accept or reject the new product line?
e. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?
Answers: 1
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