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Faced with headquarters' desire to add a new product line, Stefan Grenier, manager of Bilti Products' East Division, felt that he had to see the
Faced with headquarters' desire to add a new product line, Stefan Grenier, manager of Bilti Products' East Division, felt that he had to see the numbers before he made a move. His division's ROI has led the company for three years, and he doesn't want any letdown. Bilti 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's East Division for last year are given below: Sales Variable expenses $ 25,900,000 14,030,000 Contribution margin Fixed expenses 11,870,000 9,539,000 Operating income $ 2,331,000 Divisional operating assets $ 6,475,000 The company had an overall Rol of 18% last year (considering all divisions). The new product line that headquarters wants Grenier's East Division to add would require an investment of $3,700,000. The cost and revenue characteristics of the new product line per year would be as follows: Sales Variable expenses Fixed expenses $11,100,000 60% of sales $ 3,663,000 4. Suppose that the company's minimum required rate of return on operating assets is 16% and that performance is evaluated using residual income. a. Compute East Division's residual income for last year; also compute the residual income as it would appear if the new product line were added. Present New Line T otal Residual income b. Under these circumstances, if you were in Grenier's position, would you accept or reject the new product line? O Accept O Reject
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