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	$	28,000,000
Variable expenses		13,000,000
Contribution margin		15,000,000
Fixed expenses		12,816,000
Net operating income	$	2,184,000
Divisional operating assets	$	5,600,000

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 $3,030,000. The cost and revenue characteristics of the new product line per year would be as follows:

Sales	$ 9,393,000
Variable expenses	65% of sales
Fixed expenses	$ 2,601,861

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 company performed the same as last year and added the new product line.

	Residual income
Present	$
New product line alone	$
Total	$

b.

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

Accept

Reject

Financial data for Bridger, Inc., for last year are as follows:

Bridger, Inc. Balance Sheet
	Beginning Balance		Ending Balance
Assets
Cash	$	127,000	$	126,000
Accounts receivable		333,000		489,000
Inventory		574,000		472,000
Plant and equipment, net		806,000		793,000
Investment in Brier Company		410,000		432,000
Land (undeveloped)		245,000		248,000
Total assets	$	2,495,000	$	2,560,000
Liabilities and Stockholders' Equity
Accounts payable	$	371,000	$	339,000
Long-term debt		972,000		972,000
Stockholders' equity		1,152,000		1,249,000
Total liabilities and stockholders' equity	$	2,495,000	$	2,560,000

Bridger, Inc. Income Statement
Sales		$	4,278,000
Operating expenses			3,507,960
Net operating income			770,040
Interest and taxes:
Interest expense	$ 130,000
Tax expense	208,000		338,000
Net income		$	432,040

The company paid dividends of $335,040 last year. The Investment in Brier Company on the balance sheet represents an investment in the stock of another company.

Required:
1.	Compute the companys margin, turnover, and return on investment (ROI) for last year. (Round your intermediate calculations and final answers to 1 decimal place.)

Margin	%
Turnover
ROI	%

2.	The board of directors of Bridger, Inc., has set a minimum required return of 19%. What was the companys residual income last year?

Residual income

$