| “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 the most recent year are given below: |
| Sales | $ | 21,600,000 |
| Variable expenses | 13,622,600 | |
| Contribution margin | 7,977,400 | |
| Fixed expenses | 6,010,000 | |
| Net operating income | $ | 1,967,400 |
| Divisional operating assets | $ | 4,499,200 |
| The company had an overall return on investment (ROI) of 17.00% 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 $2,326,200. The cost and revenue characteristics of the new product line per year would be: |
| Sales | $ 9,300,000 |
| Variable expenses | 65% of sales |
| Fixed expenses | $ 2,557,400 |
| Required: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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. (Do not round intermediate calculations. Round your Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)
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