I know headquarters wants us to add that new product line, said Dell Havasi, manager of Billings Companys Office Products Division. But I want to see the numbers before I make any move. Our divisions return on investment (ROI) has led the company for three years, and I dont want any letdown. Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the companys Office Products Division for this year are given below:

Sales $ 22,505,000

Variable expenses 14,105,500

Contribution margin 8,399,500

Fixed expenses 6,145,000

Net operating income $ 2,254,500

Divisional average operating assets $ 4,687,500

The company had an overall return on investment (ROI) of 17.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $3,261,000. The cost and revenue characteristics of the new product line per year would be:

Sales $9,750,000

Variable expenses 65% of sales

Fixed expenses $2,595,300

Required:

1. Compute the Office Products Divisions ROI for this year.

2. Compute the Office Products Divisions ROI for the new product line by itself.

3. Compute the Office Products Divisions ROI for next year assuming that it performs the same as this year and adds the new product line.

4. If you were in Dell Havasis position, would you accept or reject the new product line?

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

6. Suppose that the companys minimum required rate of return on operating assets is 14% and that performance is evaluated using residual income.

a. Compute the Office Products Divisions residual income for this year. b. Compute the Office Products Divisions residual income for the new product line by itself. c. Compute the Office Products Divisions residual income for next year assuming that it performs the same as this year and adds the new product line. d. Using the residual income approach, if you were in Dell Havasis position, would you accept or reject the new product line?