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Problem 1 1 - 2 1 Return on Investment and Residual Income [ LO 3 , LO 4 ] Faced with headquarters' desire to add

Problem 11-21 Return on Investment and Residual Income [LO3, LO4]
Faced with headquarters' desire to add a new product line, Stefan Grenier, manager of Bilti Products' East Division, felt that he had to
see the numbers before he made a move. His division's ROI has led the company for three years, and he doesn't want any letdown.
Bilti 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 given below:
The company had an overall ROI of 14% last year (considering all divisions). The new product line that headquarters wants Grenier's
East Division to add would require an investment of $5,000,000. The cost and revenue characteristics of the new product line per yea
would be as follows:
Required:
Compute the East Division's ROI for last year; also compute the ROI as it would appear if the new product line were added. (Do not
round intermediate calculations. Round your final answer to the nearest whole number.)
If you were in Grenier's position, would you accept or reject the new product line?
Accept
Reject
Why do you suppose headquarters is anxious for the East Division to add the new product line?
Adding the new line would increase the company's overall ROI.
Adding the new line would decrease the company's overall ROI.
Suppose that the company's minimum required rate of return on operating assets is 11% and that performance is evaluated using
residual income.
a. Compute East Division's residual income for last year; also compute the residual income as it would appear if the new product line
were added.
b. Under these circumstances, if you were in Grenier's position, would you accept or reject the new product line?
Accept
Reject
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