PROBLEM 11-17 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 divi- sions 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 ROL 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: Sales Variable expenses 21,000,000 13,400000 600,000 920,000 1680000 $5250000 R99H494 Fixed expenses Operating income Divisional operating assets The company had an overall ROI of 18% last year (considering all divisions). The new product line that headquarters wants Grenier's East Division to add would require an investment of 3,000,000. The cost and revenue characteristics of the new product line per year would be as follows Variable expenses Fixed expenses 65% of sales 2,520,000 Required 1 Compute the East Division's ROI for last year; also compute the ROl as it would appear if the new product line were added. If you were in Greniers position, would you accept or reject the new product line? Explain Why do you suppose headquarters is anxious for the East Division to add the new product ine Suppose that the company's minimum required rate of return on operating assets is 15% and that performance is evaluated using residual income. 2. 3. 4. a. Compute East Division's residual income for last year; also compute the residual in come 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? Explain