“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 divi-
sions 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