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

Sparks 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 companys Central Division for last year are given below:

Sales	$	24,500,000
Variable expenses		15,590,909
Contribution margin		8,909,091
Fixed expenses		6,674,000
Net operating income	$	2,235,091
Divisional operating assets	$	6,125,000

The company had an overall ROI of 19% last year (considering all divisions). The companys Central Division has an opportunity to add a new product line that would require an investment of $3,930,000. The cost and revenue characteristics of the new product line per year would be as follows:

Sales

$ 11,540,000

Variable expenses

65% of sales

Fixed expenses

$ 3,120,910

Suppose that the companys minimum required rate of return on operating assets is 16% and that performance is evaluated using residual income.

a.	Compute the Central Divisions residual income for last year; also compute the residual income as it would appear if the new product line is added. PRESENT:_________ NEW PRODUCT LINE ALONE:_______ TOTAL:__________________