Reference no: EM132631897

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                                 $ 21,400,000
Variable expenses                  13,515,400
Contribution margin                 7,884,600
Fixed expenses                      5,980,000
Net operating income            $ 1,904,600
Divisional operating assets       $ 5,350,000

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 $2,875,000.

The cost and revenue characteristics of the new product line per year would be:

Sales $ 9,200,000
Variable expenses 65% of sales
Fixed expenses $ 2,548,400

Required:
 
Question 1: Compute the Office Products Division's ROI for the most recent year; also compute the ROI as it would appear if the new product line is added. (Round the "Margin", "Turnover" and "ROI" answers to 2 decimal places.)

Question 2: If you were in Dell Havasi's position, would you accept or reject the new product line?

• Accept
• Reject

Question 3: Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?

Adding the new line would Increase the company's overall ROI.
Adding the new line would Decrease the company's overall ROI.

Question 4: Suppose that the company's minimum required rate of return on operating assets is 13.00% and that performance is evaluated using residual income.