Characteristics of the new product line per year

Question

%u201CI know headquarters wants us to add that new product line,%u201D said Fred Halloway, manager of Kirsi Products%u2019 East Division. %u201CBut I want to see the numbers before I make a move. Our division%u2019s return on investment has led the company for three years, and I don%u2019t want any letdown.%u201D

Kirsi Products is a decentralized wholesaler with four autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to divisional managers who have the highest ROI. Operating results for the company%u2019s East Division for last year are given below:

Sales	$	22,400,000
Variable expenses		14,000,000
Contribution margin		8,400,000
Fixed expenses		6,675,200
Net operating income	$	1,724,800
Divisional operating assets	$	5,600,000

The company had an overall ROI of 18% last year. The company%u2019s East Division has an opportunity to add a new product line that would require an investment of $2,950,000.The cost and revenue characteristics of the new product line per year would be as follows:

Sales	$ 8,850,000
Variable expenses	65% of sales
Fixed expenses	$ 2,460,300

1.	Compute the East Division%u2019s ROI for last year; also compute the ROI as it would appear if the company performed the same as last year and added the new product line.

	ROI
Present	%
New product line alone	%
Total	%

2.	If you were in Fred Halloway%u2019s position, would you accept or reject the new product line?
	Accept Reject

3.	Why do you suppose headquarters is anxious for the East Division to add the new product line?
	Adding the new line would increase the company's overall ROI. Adding the new line would decrease the company's overall ROI.

4.	Suppose that the company%u2019s minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income.

a.	Compute the East Division%u2019s residual income for last year; also compute the residual income as it would appear if the company performed the same as last year and added the new product line.

	Residual income
Present	$
New product line alone	$
Total	$

b.	Under these circumstances, if you were in Fred Halloway's position would you accept or reject the new product line?
	Accept Reject