Kirsi Products is a decentralised 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	$21,000,000
Less: Variable expenses	$13,400,000
Contribution margin	$7,600,000
Less: Fixed expenses	$5,920,000
Net operating income	$ 1,680,000
Divisional operating assets	$ 5,250,000

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

Sales	$9,000,0
Variable expenses	$5,850,000
Contribution margin	$3,150,000
Fixed expenses	$2,520,000
Net operating income	$ 630,000

When asked about the proposal to add a product line, Fred Halloway, manager of Kirsi Products East Division made the following comment. I know headquarters wants us to add that new product line 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.

Required:

(a) Compute the East Divisions ROI for last year using DuPont method of profitability; also compute the ROI as it would appear if the company performed the same as last year and added the new product line.

(b) If you were in Fred Halloways position, would you accept or reject the new product line? Explain.

(c) Why do you suppose headquarters is anxious for the East Division to add the new product line?

(d) Suppose that the companys minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income. Compute the East Divisions residual income for last year and as it would appear if the company performed the same as last year and added the new product line and comment on whether Fred would accept or reject the new product line under these circumstances.