"I know headquarters wants us to add on 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 has led the company for three years, and I don't want any letdown." Billings Company is a decentralized organization with five autonomous divisions. The divisions are evaluated on the basis of the return that they are able to generate on invested assets, with year-end bonuses given to the divisional managers who have the highest ROI figures. Operating results for the company's office products division for the most recent year are as follows:

Sales 10,000,000

Less: Variable expenses 6,000,000

Contribution margin Less: 4,000,000

Fixed expenses 3,200,000

Net operating income 800,000

Divisional operating assets 4,000,000

The company had an overall ROI of 15% last year (considering all divisions). The office products division has an opportunity to add a new product line that would require an additional investment in operating assets of $1,000,000. The cost and revenue characteristics of the new product line per year would be as follows

sales 2,000,000

variable expenses 60% of sales

fixed expenses 640,000

1. Compute the office products division's ROI for the most recent year; also compute the ROI if the new product line were added.

2. If you were in Dell Havasi's position, would you be inclined to accept or reject the new product line? Explain.

3. Why do you suppose headquarters is anxious for the office products division to add the new product line?

4. Suppose that the company views a return of 12% on invested assets as being the minimum that any division should earn and that performance is evaluated by the RI approach.

a. Compute the office products division's RI for the most recent year; also compute the RI as it would appear if the new product line were added.

b. Under these circumstances, if you were in Dell Havasi's position, would you accept or reject the new product line? Explain