I know headquarters wants us to add that new product line sa

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 ROl, with year-end bonuses given to the divisional managers who have the highest ROls. Operating results for the company\'s Office Products Division for the most recent year are given below Sales $23,000,000 Variable expenses 14,365,000 Contribution margin 8,635,000 Fixed expenses Net operating income Divisional operating assets 6,220,000 $2,415,000 $ 5,001,000 The company had an overall return on investment (ROI) of 16.00% 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 $2,501,000. The cost and revenue characteristics of the new product line per year would be Sales Variable expenses Fixed expenses $ 10,100,000 65% of sales $ 2,644,900

Solution

1.

Workings:

2. Reject

Since it would bring down the ROI from 48.29% to 44.06%.

3. Adding the new line would increase the company\'s overall ROI.

4a.

b. Accept

Since residual income with new product line is higher than present residual income.

	Present	New Line	Total
Sales	23000000		10100000		33100000
Net operating income	2415000		890100		3305100
Operating assets	5001000		2501000		7502000
Margin	10.50	%	8.81	%	9.99	%
Turnover	4.60	times	4.04	times	4.41	times
ROI	48.29	%	35.59	%	44.06	%