1. Discuss why do you suppose headquarters is anxious for the office products division to add the new product?

2. Suppose the companys minimum required rate of return on operating assets is 14% and performance is evaluated using residual income instead of ROI. If you were in Dell Havasi's position, would you accept or reject the new product? Please explain your rationale behind your decision.

Discussion Data and Information

I know headquarters wants us to add that new product line, said Dell Havasi, manager of Billings Companys Office Products Division. But I want to see the numbers before I make a decision. Our divisions return on investment (ROI) has led the company for three years, and I dont want any letdown.

Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated using ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the companys Office Products Division for this year are given below:

Sales	$ 21,902,000
Variable expenses	13,788,600
Contribution margin	8,113,400
Fixed expenses	6,055,000
Net operating income	$ 2,058,400
Divisional average operating assets	$ 4,562,500

The company had an overall return on investment (ROI) of 18.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product requiring $2,250,500 of additional average operating assets. The annual cost and revenue estimates for the new product would be:

Sales	$ 9,450,000
Variable expenses	65% of sales
Fixed expenses	$ 2,570,200