The major operating divisions of Grey Company are organized as investment centers for performance-evaluation purposes. The division managers are evaluated, in part, on the basis of the change in the return on investment (ROI) of their units. Operating results for the Division A for the coming year, 2016, based on its existing assets are budgeted as follows:

Sales	$5,000,000
Less variable costs	2,500,000
Contribution margin	2,500,000
Less fixed expenses	1,800,000
Operating income	$700,000

Operating assets for the Division A are currently $3,600,000. For 2016, the division can add a new product line for an investment of $600,000. The new product line is expected to generate sales of $1,600,000 and will incur fixed expenses of $600,000 annually. Variable costs of the new product are expected to average 60% of the selling price.

Required:

1. ROI

a. What is the current ROI?

b. What is the new product lines ROI?

c. What is the divisional ROI after the new investment

d. How does ROI impact managements behavior?

2. Residual Income

a. If the required rate of return is 6%, what is the residual income amount?

b. If residual income was used to evaluate this opportunity, how would it impact managements behavior?