Problem $10-18($Algo$)$ Return on Investment $($ROI$)$ and Residual Income $[$LO$10-1,$ LO$10-2]$

$$I know headquarters wants us to add that new product line,$$ said Dell Havasi, manager of Billings Company$$s Office Products Division. $$But I want to see the numbers before I make any move. Our division$$s return on investment $($ROI$)$ has led the company for three years, and I don$$t 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 company$$s Office Products Division for this year are given below:

Sales $ $22,700,000$

Variable expenses $14,363,700$

Contribution margin $8,336,300$

Fixed expenses $6,175,000$

Net operating income $ $2,161,300$

Divisional average operating assets $ $5,675,000$

The company had an overall return on investment $($ROI$)$ of $16\mathrm{.}00\%$ 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 $$3,938,000.$ The cost and revenue characteristics of the new product line per year would be:

Sales $ $9,800,000$

Variable expenses $65\%$ of sales

Fixed expenses $ $2,582,900$

Required:

$1.$ Compute the Office Products Division$$s ROI for this year.

$2.$ Compute the Office Products Division$$s ROI for the new product line by itself.

$3.$ Compute the Office Products Division$$s 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 Havasi$$s 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 company$$s minimum required rate of return on operating assets is $13\%$ and that performance is evaluated using residual income.

a$.$ Compute the Office Products Division$$s residual income for this year.

b$.$ Compute the Office Products Division$$s residual income for the new product line by itself.

c$.$ Compute the Office Products Division$$s 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 Havasi$$s position, would you accept or reject the new product line?