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Module 1 ch.12

Dell Havasi, manager of Billings Company's office products division, is hesitant to add a new product line without seeing the numbers first. The division has led the company for three years in return on invested assets (ROI). The document provides financial details for the office products division and the proposed new product line. It calculates the division's current and potential future ROI both with and without the new product line, and asks if Havasi would accept or reject the line in each scenario.

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Melody Didi
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44 views

Module 1 ch.12

Dell Havasi, manager of Billings Company's office products division, is hesitant to add a new product line without seeing the numbers first. The division has led the company for three years in return on invested assets (ROI). The document provides financial details for the office products division and the proposed new product line. It calculates the division's current and potential future ROI both with and without the new product line, and asks if Havasi would accept or reject the line in each scenario.

Uploaded by

Melody Didi
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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3/27/2021 Assignment Print View

 
4. Award: 10.00 points
 

“I know headquarters wants us to add on 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 has led the company for three years, and I don’t want any letdown.”

Billings Company is a decentralized organization with five autonomous divisions. The divisions are
evaluated on the basis of the return that they are able to generate on invested assets, with year-end
bonuses given to the divisional managers who have the highest ROI figures. Operating results for the
company’s office products division for the most recent year are as follows:

Sales $ 37,500,000
Less: Variable expenses 24,375,000
Contribution margin 13,125,000
Less: Fixed expenses 10,500,000
Net operating income $ 2,625,000
Divisional operating assets $ 15,000,000

The company had an overall ROI of 10.0% 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 $3,750,000. The cost and revenue characteristics of the new product line per year
would be as follows:

Sales $ 5,625,000
Variable expenses 65% of sales
Fixed expenses $ 1,575,000

Required:
1. Compute the office products division’s ROI for the most recent year; also compute the ROI if the
new product line were added. (Do not round intermediate calculations. Round "Percentage"
answers to 2 decimal places, (i.e., 0.1234 should be considered as 12.34%).)

Present New Line Total


ROI 17.50 % 10.50 % 16.10 %

2. If you were in Dell Havasi’s position, would you be inclined to accept or reject the new product line?

Accept
Reject

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3/27/2021 Assignment Print View

3. This part of the question is not part of your Connect assignment.

4. Suppose that the company views a return of 9.5% on invested assets as being the minimum that
any division should earn and that performance is evaluated by the RI approach.

a. Compute the office products division’s RI for the most recent year; also compute the RI as it would
appear if the new product line were added.

Present New Line Total


RI $ 1,200,000 $ 37,500 $ 1,237,500

b. Under these circumstances, if you were in Dell Havasi’s position, would you accept or reject the
new product line?

Accept
Reject

References

Worksheet Learning Objective:


12-02 Explain key
financial
performance metrics
reported in a
decentralized
organization.

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