I know headquarters wants us to add that new product line, said Fred Halloway, manager of Kirsi Products East 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.

Kirsi 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 East Division for last year are given below:

Sales	$	21,000,000
Variable expenses		13,400,000
Contribution margin		7,600,000
Fixed expenses		5,920,000
Net operating income	$	1,680,000
Divisional operating assets	$	5,250,000

The company had an overall ROI of 18% last year (considering all divisions). The companys East Division has an opportunity to add a new product line that would require an investment of $3,000,000. The cost and revenue characteristics of the new product line per year would be as follows:

Sales	$ 9,000,000
Variable expenses	65% of sales
Fixed expenses	$ 2,520,000

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

	Present	New Line	Total
Sales
Net operating income
Operating assets
Margin
Turnover
ROI
	sheet is drawn here

2.

If you were in Fred Halloways 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 decrease the company's overall ROI.
	Adding the new line would increase the company's overall ROI.

4.	Suppose that the companys minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income.

a.	Compute the East Divisions residual income for last year; also compute the residual income as it would appear if the new product line is added.

	Present	New Line	Total
Operating assets
Minimum required return
Minimum net operating income
Actual net operating income
Minimum net operating income
Residual income
	sheet is drawn here

b.

Under these circumstances, if you were in Fred Halloway's position would you accept or reject the new product line?

	Accept
	Reject

rev: 12_09_2013_QC_42100, 04_30_2014_QC