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 number before i make a move. Our division's return on investments (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 company's East Division for last year are below:

Sales: $21,000,000

Variable Expenses 13,400,000

Contribution Margin 7,600,000

Fixed Expenses 5,920,000

Net Operating Income 1,680,000

Divisional Operating assetss 5,250,000

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

Sales $9,000,000

Variable Expenses 65% f sales

Fixed expenses 2,520,000

Solve

1. Compute the East Divisions ROI for last year, also compute the ROI as it would appear if the new product line is added.

2. Suppose that the company's minimum required rate of return on operating assets is 15% and that performance is evaulated using residual income

A) Compute the East Divisions residual income for last year; also compute the residual income as it would appear if the new product line is added.