"I know headquarters wants us to add 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 a decision. Our division's return on investment (ROl) has led the company for three years, and I don't want any letdown."

Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated using ROl, with year-end bonuses given to the divisional managers who have the highest ROls. Operating results for the company's Office Products Division for this year are given below:

Sales: $21,810,000

Variable expenses: $13,741,200

Contribution margin: $8,068,800

Fixed expenses: $6,040,000

Net operating income: $2,028,800

Divisional average operating assets: $4,363,000

The company had an overall return on investment (ROl) of 18.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product requiring $2,350,000 of additional average operating assets. The annual cost and revenue estimates for the new product would be:

Sales: $9,396,500

Variable expenses: 65% of sales

Fixed expenses: $2,564,875

1. Compute the office products, divisions, margin, turnover, and ROI for this year.

2. Compute the office products, divisions, margin, turnover, and ROI for the new product by itself.

3. Compute the office products, divisions, margin, turnover, and ROI for next year assuming it performs the same as this year and adds the new product.

4. If you were in Dell Havasi's position, would you accept or reject the new product?

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

6. Suppose the companies minimum required rate of return on operating assets is 15% and performance is evaluated using residual income:

A. Compute the office products divisions residual income for this year.

B. Compute the office products divisions residual income for the new product by itself.

C. Compute the Office products divisions residual income for next year assuming it performs the same as this year and adds the new product.