Konopka Inc. is a decentralized retail company that sells different types of packaging boxes. Executives of the company are planning to add a new product line such as stationery and asked the manager of the Office Products Division, Sara Parker, to think about it. Before taking any action, Sara wanted to see the numbers because the division's return on investment (ROI) had led the company for 3 years and she does not want any letdown.

The company's divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Selected operating activities for the Office Products Division for the mostrecentyeararegiven below:

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

Konopka had an overall return on investment (ROI) of 15% last year (considering alldivisions). The Office Products Division has an opportunity to add a new product line that would requirean additional investment in operating assets of $2,000,000. The cost and revenue characteristics of thenewproduct lineper yearwouldbe:

Sales $4,000,000

VariableExpenses 55% ofsales

FixedExpenses 1,450,000

1. Compute the Office Products Division's ROI for the most recent year; also compute the ROI as it wouldappearif thenewproductlinewereadded.

1. Ifyouwere inSara'sposition,wouldyouacceptorreject the new productline?Explain.

1. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?
2. Suppose that the company's minimum required rate of return on operating assets is 15% and that performanceisevaluatedusingresidualincome.
   1. Compute the Office Products Division's residual income for the most recent year; also computethe residual incomeas itwouldappear ifthe newproductlinewereadded.
   2. Under these circumstances, if you were in Sara's position, would you accept or reject the new productline?Explain.