"Iknowheadquarterswantsustoaddthatnewproduct line,"saidBellaTroung,manager of Haley Company'sOfficeProducts Division."But Iwant to see the numbersbefore I makeanymove.Our division's return on investment (ROI) has led the company for three years, and Idon't want any letdown."

Haley Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluatedonthebasisofROI,withyear-end bonusesgiventothedivisionalmanagerswhohavethe highest ROIs. Selected operating activities for the company's Office Products Division for the most recent year are given below:

Sales	$20,000,000
VariableExpenses	12,000,000
FixedExpenses	6,400,000
DivisionOperatingAssets	8,000,000

The Haley Company had an overall return on investment (ROI) of 15% last year (considering all divisions).TheOfficeProducts Divisionhasanopportunitytoaddanewproduct linethatwouldrequire an additional investment in operating assets of $2,000,000. The cost and revenue characteristics of the new product line per year would be:

Sales $4,000,000

VariableExpenses 55% ofsales

FixedExpenses 1,450,000

Operating Assets $2,000,000

Required:

1. ComputetheOfficeProducts Division'sROIforthemostrecentyear;alsocompute theROIasit would appear if the new product line is added.
2. IfyouwereinBella'sposition,wouldyouacceptorrejectthenewproduct line?Explain.
3. Whydoyousuppose headquartersisanxious fortheOfficeProductsDivision toaddthenew product line?
4. Supposethatthecompany's minimumrequiredrateofreturn onoperatingassets is15%and that performance is evaluated using residual income.
   1. ComputetheOffice ProductsDivision'sresidual incomeforthemostrecent year;also compute the residual income as it would appear if the new product line is added.
   2. Underthesecircumstances,ifyouwereinBella's position,wouldyouacceptorreject the new product line? Explain.