Reference no: EM132527709
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 $ 21,200,000
Variable expenses 13,405,600
Contribution margin 7,794,400
Fixed expenses 5,950,000
Net operating income $ 1,844,400
Divisional average operating assets $ 4,240,000
The company had an overall return on investment (ROI) of 19.00% 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 $2,600,000.
The cost and revenue characteristics of the new product line per year would be:
Sales $9,100,000
Variable expenses 65% of sales
Fixed expenses $2,538,900
Required
Question 1: Determine the Office Products Division's ROI for next year assuming that it performs the same as this year and adds the new product line