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: $30,100,000
• Variable expenses:$14,570,000
• Contribution margin:$15,530,000
• Fixed expenses:$13,122,000
• Operating income: $2,408,000
• Divisional operating assets: $7,525,000

The company had an overall ROI of 13% last year (considering all divisions). The new product line that headquarters wants Grenier's East Division to add would require an investment of $4,300,000. The cost and revenue characteristics of the new product line per year would be as follows:

• Sales: $12,900,000
• Variable expenses:60% of sales
• Fixed expenses:$4,515,000

REQUIRED:

1.Compute the East Division's ROI for last year; also compute the ROI as it would appear if the new product line were added.(Do not round intermediate calculations. )

• Present ROI = ______%
• New Line ROI = ______%
• Total ROI = _____%

2.If you were in Grenier's 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's minimum required rate of return on operating assets is 12% and that performance is evaluated using residual income.

4a). 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 residual income = ______
• New Line residual income = ______
• Total residual income = _____

4b).Under these circumstances, if you were in Grenier's position, would you accept or reject the new product line?

• Accept
• Reject