"I know headquarters wants us to add that new product line," said Fred Holloway, manager of Kristi

Products' West Division.

"But I want to see the numbers before I make a move Our division's

return on investment (ROD has led the company for three ears, and I don't want any letdown

Kristi 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 RO1. Operating results for the company's West Division for the last year are given below:

Sales...

Variable expenses.

Contribution margin.

Fixed expenses.

Net Operating Income.

Divisional Operating Assets.

$21,000,000

13,400.000

7.600.000

5,920.000

$ 1,680.000

$ 5,250.000

The company had an overall ROl of 18% last year (considering all divisions). The company's West

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.

Variable expenses.

Fixed expenses.

$9.000.000

65% of sales

$2,520,000

Required:

(2 points) Compute the West Division's RI for last year; also compute the ROl as it

would appear if the company duplicated the same performance as last year and also added

the new product line.

(2 points) If you were in Fred Holloway's position, would you accept or reject the new

product line? Explain

(2 points) Why do you suppose headquarters is anxious for the West Division to add the

neW productline)

Suppose that the company's minimum required rate of return on operating assets is 15% and

that the performance is evaluated using residual income.

(2 points) Compute the West Division's residual income for the last year; also compute

the residual income as it would appear if the company duplicated the same performance

as last year and also added the new product line.

(2 points) Under these circumstances, if you were in Fred Holloway's position would

you accept or reject the new product line? Explain.

Chapter 11 CaseI know headquarters wants us to add that new product line, said Fred Holloway, manager of