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 any move. 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 on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the companys Office Products Division for the most recent year are given below:

Sales$21,200,000

Variable expenses 13,405,600

Contribution margin 7,794,400

Fixed expenses 5,950,000

Net operating income$1,844,400

Divisional operating assets$4,240,000

The company had an overall return on investment (ROI) of 19.00% 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 $2,600,000. The cost and revenue characteristics of the new product line per year would be:

Sales$ 9,100,000

Variable expenses65% of sales

Fixed expenses$ 2,538,900

Required:
1.	Compute the Office Products Divisions ROI for the most recent year; also compute the ROI as it would appear if the new product line is added. (Round the "Margin", "Turnover" and "ROI" answers to 2 decimal places.)

	Present	new line	total
sales
net operating income
operating assets
margin
turnover
ROI

Suppose that the companys minimum required rate of return on operating assets is 16.00% and that performance is evaluated using residual income.

a.

Compute the Office Products Divisions residual income for the most recent year; also compute the residual income as it would appear if the new product line is added.

	Present	New	Total
operating assets
minimum required return	%	%	%
minimum net income
actual net operating income
minimum net operating income
residual income