Problem 11-21 (Algo) Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] "I know headquarters wants us to add that new product line," said Dell Havasi, manager of Bellings Company's Omice Products Division. "But I want to see the numbers before I make any move. Our division's return on irivestment (RO) has led the company for three years, and I don't want any letdown." Ballings Company is a decentralized wholesaler with five autonomous divisions. The divistons are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest Rols. Operating results for the company's OIfice Products Division for this year are given below. The company had an overall retum on investment (ROI) of 17.0% 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 $2,313,700. The cost and revenue charactenstics of the new product line per year would be: Required: 1. Compute the Office Products Division's margin, turnover, and ROI for this yeat. 2. Compute the Office Products Division's margin, turnover, and ROl for the new product line by itself. 3. Compute the Orfice Products Division's margin, turnover, and 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 ine? 5 Why do you suppose headquarters is anxious for the Office Products Division to odd the new product line? 6 Suppose that the compary's minimum required rate of return on operating assets is 14% and that performance is evaluated using residuat income. a. Compute the Office Products Divelion's residual income for this yeat b. Compute the Office Products Division's residual income for the new product line by itseif. c. Compute the Office Products Divesion's residual tncome 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 of reject the new product line