Problem 10-18 Return on Investment (ROI) and Residual Income [LO10-1, LO10-2] "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 highest ROIs. Operating results for the company’s Office Products Division for this year are given below: Sales $ 10,000,000 Variable expenses 6,000,000 Contribution margin 4,000,000 Fixed expenses 3,200,000 Net operating income $ 800,000 Divisional average operating assets $ 4,000,000 The company had an overall return on investment (ROI) of 15% 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 $1,000,000. The cost and revenue characteristics of the new product line per year would be: Sales $2,000,000 Variable expenses 60% of sales Fixed expenses $640,000

Solution :

Income on new line

Contribution (2,000,00 x40%)           800,000

Less fixed expense                          - 640,000

Net operating income                        160,000

Particulars                              Present            New line          Total

Sales                                 10,000,000      2,000,000    12,000,000      

Net operating income      800,000            160,000        960,000

Operating assets             4,000,000         1,000,000   5,000,000

Margin                                   8%                       8%               8%

ROI                                     20.00%                16.00%         19.20%

Residual income   = net operating income - (average assets x minimum rate or return)

Particulars                                  Present            New line          Total

Operating assets                   4,000,000         1,000,000   5,000,000      

Minimum required return          12 %                   12 %             12 %

Min net operating income     480,000             120,000      600,000

Actual net operating income  800,000            160,000      960,000

Residual income                      320,000               40,000      360,000      

answer; ///blank(1); security; blank(2); freedom; good luck

whole quiz

1. the sum of all activities involved in getting high-quality products into the marketplace

2.operations

3. the principle of looking at the supply chain as a whole in order to improve the overall flow through the system.

4. produced; performed

5. activities producing tangible products, such as radios, newspapers, buses, and textbooks.

6. activities producing intangible and tangible products, such as entertainment, transportation, and education.

7.   customer focus

8. analyzing a competitor's products to identify desirable improvements

9. the systematic direction and control of the processes that transform resources into finished projects that create value for and provide benefits to consumers.

10. operation management.

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