"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 $($ROI$)$ 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 ROI, 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:

The company had an overall return on investment $($ROI$)$ of $15\%$ this year $($considering all divisions$).$ Next year the Office Products

Division has an opportunity to add a new product requiring $$1,000,000$ of additional average operating assets. The annual cost and

revenue estimates for the new product would be:

Sales

Variable expenses

Fixed expenses

Required:

Compute the Office Products Division's margin, turnover, and ROI for this year.

Compute the Office Products Division's margin, turnover, and ROI for the new product by itself.

Compute the Office Products Division's margin, turnover, and ROI for next year assuming it performs the same as this year and adds

the new product.

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

Why do you suppose headquarters is anxious for the Office Products Division to add the new product?

Suppose the company's minimum required rate of return on operating assets is $12\%$ and performance is evaluated using residual

income.

a$.$ Compute the Office Products Division's residual income for this year.

b$.$ Compute the Office Products Division's residual income for the new product by itself.

c$.$ Compute the Office Products Division's residual income for next year assuming it performs the same as this year and adds the

new product.

d$.$ Using the residual income approach, if you were in Dell Havasi's position, would you accept or reject the new product?