Problem 2: "I know headquarters wants us to add that new product line," said Fred Halloway, manager of Kirsi Products' East Division. "But I want to see the numbers before I make a move. Our division's return on investment has led the company for three years, and I don't want any letdown." Kirsi 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 ROL. Operating results for the East Division for the last year is give below: Kirsi Products - Last years' operating results for the East Division: $ 21,000,000 es Variable Expenses $ 13,400,000 $ 76,000,000 Contribution Margin Fixed Expenses $ 5,920,000 Net operating Income 1,680,000 Divisional operating assets 5,250,000 The company had an overall ROI of 18 % last ycar. The East Division has an opportunity to add a new product line that would require an investment of $3,000,000. The cost and the revenues for the new product line per year would be as follows: Additional information: Overall company ROI last year 18% Investment needed for new product line 3000000 Revenue characteristics for new product line: Sales 9000000 Variable expenses as a percent of sales Fixed expenses 65 % 2520000 1) Compute the ROI for last year and how it would be with the new product line. 2) If you were Fred Halloway, would you accept or reject the new product line and why? 3) Recompute assuming a minimum rate of return at 15 %. Now would you accept or reject the new product line? Net operating Income for new product line: Sales Variable Exp Contribution Margin Fixed Expenses Net operating Income Present New Line Total Sales Net operating income Operating assets Margin Turnover ROI Recompute Operating Assets Minimum required return Minimum net operating Income Actual net operating Income Minimum net operating income Residual Income