Suppose that the companys minimum required rate of return on operating assets is 12% and that performance is evaluated using residual income.

"I know headquarters wants us to add that new product line," said Dell Havasi, managerof Billings Company's Office Products Division. "But I want to see the numbers before l make any move. Our division's return on investment (ROI) has led the company for three years, and l 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 ROls. Operating results for the company's Office Products Division for the most recent year are given below: Sales 10,000,000 Variable expenses 6.000.000 4,000,000 Contribution margin Fixed expenses 3,200,000 Net operating income 800,000 Divisional operating assets 4,000,000 The company had an overall return on investment (ROI) of 15% last year (considering all divisions). The Office Products Division has an opportunity to add a new product line that would require an additional investment in operating assets of $1,000,000. The cost and revenue characteristics of the new product line per year would be: $2,000,000 Sales Variable expenses 60% of sales Fixed expenses $640,000