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Question(s) / Instruction(s):

"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."

  Sales                                            $20,280,000 

  Variable expenses                           13,007,300 

  Contribution margin                           7,272,700 

  Fixed expenses                                 5,751,700 

  Net operating income                        $1,521,000 

  Divisional operating assets                $5,200,000 

 

 

 

 

Requirement 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

Requirement 2:

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

Requirement 3:

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

 

Requirement 4:

Suppose that the company's minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income.

(a)          Compute the Office Products Division's residual income for the most recent year; also compute the residual income as it would appear if the new product line is added.

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

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