2 If you were in Dell Havasis position would you accept or r

2. If you were in Dell Havasis position, would you accept or reject the new product line? 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 beforeI make any move, Our division\'s return on investment (ROI) has led the company for three years, and I don\'t want any letdown O Accept O Reject 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 ROls. Operating results for the company\'s Office Produets Division for the most recent year are given below 3. Why do you suppose headquarters is anxious for the Office Products Division to add the new praduct line? Sales $10,000,000 6,000,000 O Adding the new line would increase the company\'s overall ROI. O Adding the new line would decrease the company\'s overall ROI Contribution margin 4,000,000 Fixed expenses Net operating income Divisional operating assets 3,200,000 $ 800,000 $ 4,000,000 4 Suppose that the company\'s minimum required rate of retum on operating assets is 12% 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. The company had an overall return on investment (ROI) of 15% last year (considering all divisions). The Office Products Division has an apportunity to add a new product line that would require an additional investment in operating assets of $1,000,000. The cost and revenue characteristics of the new product line per year would be Present New Line Total Operating assets Minimum required return Minimum net operating income Actual net operating income Minimum net operating income Residual income $2,000,000 60% of sales S640,000 Sales Fixed expenses 1. Compute the Office Products Division\'s ROl for the most recent year, also compute the ROI as it would appear if the new product line is added. (Round the \"Turnover\". \"ROi\" answers to 1 decimal place.) New Line Sales Net operating income Operating assets b. Under these circumstances, if you were in Dell Havasi\'s position, would you accept or reject the nevw product line? Turnover O Accept O Reject ROI

Solution

Answer 1. Calculation of Net Opearting Income From New Product Line Sales        2,000,000.00 Less: Variable Cost - 60%        1,200,000.00 Contribution           800,000.00 Less: Fixed Costs           640,000.00 Net Operating Income           160,000.00 Calculation of ROI Present New Line Total Sales     10,000,000.00         2,000,000.00     12,000,000.00 Net Operating Income           800,000.00            160,000.00           960,000.00 Opearting Assets        4,000,000.00         1,000,000.00        5,000,000.00 Margin (Net Operating Income / Sales) 8.00% 8.00% 8.00% Turnover (Sales / Avg. Opearting assets)                        2.50                         2.00                        2.40 ROI (Margin X Turnover) 20.00% 16.00% 19.20% Answer 2. Reject - The new Product Line, since it will decrease his ROI to 19.20% Answer 3. Adding the new line would increase the company\'s overall ROI, since the Company overall ROI is 15% and the New Product ROI is 16% . Answer 4.a Residual Income = Net Operating Income - Min. required Return Present New Line Total Operating Assets        4,000,000.00         1,000,000.00        5,000,000.00 Minimum Required Return 12% 12% 12% Minimum Net Operating Income           480,000.00            120,000.00           600,000.00 Actual Net Operating Income           800,000.00            160,000.00           960,000.00 Less: Minimum Requied Return - 12%           480,000.00            120,000.00           600,000.00 Residual income           320,000.00               40,000.00           360,000.00 Answer 4-b. Accept the project.