I know headquarters wants us to add that new product line,” said Dell Havasi, manager of Billings Company’s Office Produ

[answerhappygod]

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
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 this year are given below:
The company had an overall return on investment (ROI) of 16.00%
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 $2,501,000. The cost and revenue
characteristics of the new product line per year would be:
Required:
1. Compute the Office Products Division’s margin, turnover, and
ROI for this year.
2. Compute the Office Products Division’s margin, turnover, and
ROI for the new product line by itself.
3. Compute the Office Products Division’s margin, turnover, and
ROI for next year assuming that it performs the same as this year
and adds the new product line.
4. If you were in Dell Havasi’s position, would you accept or
reject the new product line?
5. Why do you suppose headquarters is anxious for the Office
Products Division to add the new product line?
6. Suppose that the company’s minimum required rate of return on
operating assets is 13% and that performance is evaluated using
residual income.
a. Compute the Office Products Division’s residual income for
this year.
b. Compute the Office Products Division’s residual income for
the new product line by itself.
c. Compute the Office Products Division’s residual income for
next year assuming that it performs the same as this year and adds
the new product line.
d. Using the residual income approach, if you were in Dell
Havasi’s position, would you accept or reject the new product
line?