I know headquarters wants us to add that new product line, said Brian Stettler, manager of Sparks Products Central 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.

Sparks 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 Central Division for last year are given below:

Sales	$	22,000,000
Variable expenses		14,000,000
Contribution margin		8,000,000
Fixed expenses		6,174,000
Net operating income	$	1,826,000
Divisional operating assets	$	5,500,000

The company had an overall ROI of 18% last year (considering all divisions). The companys Central Division has an opportunity to add a new product line that would require an investment of $3,430,000. The cost and revenue characteristics of the new product line per year would be as follows:

Sales	$ 10,290,000
Variable expenses	65% of sales
Fixed expenses	$ 2,870,910

Required:
1.	Compute the Central Divisions ROI for last year; also compute the ROI as it would appear if the new product line is added. (Do not round intermediate percentage values. Round your final answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)

2.

If you were in Brian Stettlers position, would you accept or reject the new product line?

	Accept
	Reject

3.

Why do you suppose headquarters is anxious for the Central 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 Central Divisions residual income for last year; also compute the residual income as it would appear if the new product line is added.

b.

Under these circumstances, if you were in Brian Stettlers position would you accept or reject the new product line?

	Accept
	Reject

Question 3 (of 4) Save & Exit Submit 3.value: 7.00 points The contribution format income statement for Strickland, Inc., for its most recent period is given below: Total Unit Sales $ 990,000 $ 49.50 Variable expenses 594,000 29.70 Contribution margin 396,000 19.80 Fixed expenses 318,000 15.90 Net operating income 78,000 3.90 Income taxes @ 40% 31,200 1.56 Net income $ 46,800 $ 2.34 The company had average operating assets of $503,000 during the period. Required: 1. Compute the companys return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. (Round your intermediate calculations and final answer to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) For each of the following questions, indicate whether the margin and turnover will increase, decrease, or remain unchanged as a result of the events described, and then compute the new ROI figure. Consider each question separately, starting in each case from the original ROI computed in (1) above. 2. The company achieves a cost savings of $6,000 per period by using less costly materials. (Round your intermediate calculations and Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) 3. Using Lean Production, the company is able to reduce the average level of inventory by $91,000. (The released funds are used to pay off bank loans.) (Round your intermediate calculations and Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) 4. Sales are increased by $198,000; operating assets remain unchanged. (Round your intermediate calculations and Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) 5. The company issues bonds and uses the proceeds to purchase $128,000 in machinery and equipment at the beginning of the period. Interest on the bonds is $14,000 per period. Sales remain unchanged. The new, more efficient equipment reduces production costs by $5,000 per period. (Round your intermediate calculations and Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) 6. The company invests $182,000 of cash (received on accounts receivable) in a plot of land that is to be held for possible future use as a plant site. (Round your intermediate calculations and Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).) 7. Obsolete inventory carried on the books at a cost of $17,000 is scrapped and written off as a loss. (Round your intermediate calculations and Turnover answers to 2 decimal places. Round your Margin and ROI percentage answers to 2 decimal places (i.e., 0.1234 should be entered as 12.34).)