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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 division's ROl has led the company for three years, and he doesn't want any

letdown.

Bilti Productsis 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 ROl. Operating results for the company's East Division for

last year are given below:

The company had an overall ROl of $12\%$ last year $($considering all divisions$).$ The new product line that headquarters wants

Grenier's East Division to add would require an investment of $$5,400,000.$ The cost and revenue characteristics of the new

product line per year would be as follows:

Sales

Variable expenses

Fixed expenses

$$10,800,000$

$608$ of sales

$ $3,564,000$

Required:

Compute the East Division's ROl for last year; also compute the ROl as it would appear if the new product line were added. $($Do

not round intermediate calculations. Round your final answer to the nearest whole number.$)$

If you were in Grenier's position, would you accept or reject the new product line?

Accept

Reject

Why do you suppose headquarters is anxious for the East Division to add the new product line?

Adding the new line would decrease the company's overall ROI.

Adding the new line would increase the company's overall ROl.

Suppose that the company's minimum required rate of return on operating assets is $10\%$ and that performance is evaluated

using residual income.

a$.$ Compute East Division's residual income for last year; also compute the residual income as it would appear if the new product

line were added.

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