# Problem 11-21 (Algo) Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] “I know headquarters wants us to add that new

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Division’s residual income for next year assuming that it performs the same as ts year and adds the new product line. Show less 1. Residual income for ts year 2. Residual income for the new product line by itself 3. Residual income for next year |

Problem 11-21 (Algo) Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] “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 ghest ROIs. Operating results for the company’s Office Products Division for ts year are given below: Sales $ 22,900,000 Variable expenses 14,313,400 Contribution margin 8,586,600 Fixed expenses 6,205,000 Net operating income $ 2,381,600 Divisional average operating assets $ 4,580,000 The company had an overall return on investment (ROI) of 17.00% ts 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 $2,484,500. The cost and revenue characteristics of the new product line per year would be: Sales $9,942,400 Variable expenses 65% of sales Fixed expenses $2,602,240 Required: 1. Compute the Office Products Division’s margin, turnover, and ROI for ts 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 ts 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 ts 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 ts 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? 1. Compute the Office Products Division’s margin, turnover, and ROI for ts 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 ts year and adds the new product line. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Show less 1. ROI for ts year 52.00 % 2. ROI for the new product line by itself 33.71 % 3. ROI for next year 33.71 % 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 ts 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 ts year and adds the new product line. Show less 1. Residual income for ts year 2. Residual income for the new product line by itself 3. Residual income for next year

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